Real Divergence Across Europe and the Limits of EMU Macroeconomic Governance

Elisabetta Croci Angelini and Francesco Farina

Chapter 3 in Europe and the Financial Crisis, 2011, pp 46-73 from Palgrave Macmillan

Abstract: Abstract As an effect of financial globalization,1 the traditional transmission mechanism of macroeconomic disturbances based on trade flows has been substituted by the much faster international financial transmission. The financial crisis, stemmed in 2007 from ‘moral hazard’ in the creation of derivatives by banking institutions in the United States, rapidly crossed the Atlantic. European banks loaded with the overpriced derivatives created through the securization of the US subprime mortgages started deleveraging in 2008–9, so that credit conditions tightened and the mutual creditworthiness among banks progressively faded out. The credit crunch and gloomy profit expectations led to a huge drop in output in the economies of the European Economic Monetary Union (here-after: EMU) The unprecedented amount of liquidity granted to financial institutions by the European Central Bank (hereafter: ECB) avoided the drying-up of the interbank financing, and the consequent implosion of the market functioning. To revive aggregate demand after substantially negative growth rates, some EMU governments also made recourse to expansionary fiscal interventions.

Keywords: Monetary Policy; Current Account; Fiscal Policy; Monetary Union; Current Account Deficit (search for similar items in EconPapers)
Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-0-230-30500-7_4

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DOI: 10.1057/9780230305007_4

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