Is Another Eurozone Crisis Coming?

Graham Bird, Wenti Du and Eric Pentecost

World Economics, 2022, vol. 23, issue 3, 29-48

Abstract: The Eurozone crisis in the early 2010s was a landmark event. However, markets did not seem to see it coming. It was only once the crisis had begun that markets received a wake-up call, and risk premia began to rise sharply. Markets then began to act in a way that was more consistent with the efficient markets hypothesis. However, in the subsequent aftermath of the crisis, risk premia have fallen again, even though a number of conventional indicators of vulnerability, for example in the form of fiscal imbalances and indebtedness, suggest that some members of the Eurozone remain vulnerable. Shocks in the form of the COVID-19 pandemic and the Ukraine war are likely to expose this vulnerability and increase the risks of there being another crisis. There are various scenarios in terms of the future of the Eurozone. These have different implications for the probability of there being a crisis. Another crisis remains a distinct possibility. Are markets assessing the risks appropriately, or is it that, having woken up following the last crisis, they may have gone back to sleep? Are they underestimating the risks of another Eurozone crisis?

Date: 2022
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