The Eurozone Crisis: A Consensus View of the Causes and a Few Possible Solutions

There is a new VOXEU ebook with contributions on this topic – here.  (My contribution is on “International financial flows and the Eurozone crisis”.)



5 thoughts on “The Eurozone Crisis: A Consensus View of the Causes and a Few Possible Solutions”

  1. What all these distinguished and eminent contributors appear to fail to recognise is that the dominant model of neoclassical economics was holed below the water-line in 2008 and governing politicians, policy makers, administrators and regulators continue to struggle to prevent the vessel from listing even further. Central bankers have been forced to use “unconventional” measures such as QE which, while intended to flatten long term interest rates, to encourage banks to increase lending to productive activities and to increase inflation moderately, has actually failed to increase lending to productive activities, has been exploited by banks to increase their profitability and to restore their bonus culture, has fuelled financial speculation and, rather than increase general inflation, has inflated asset bubbles.

    On the fiscal front in the EU, governing politicians and policy makers have applied fiscal compacts, “two-packs” and “six-packs” in a damaging and futile exercise to reduce fiscal deficits and government borrowing. Germany, and quite a few countries in its orbit, has an anally retentive compulsion about achieving this “schwarze null” or “black zero” fiscal balance. All governments use slightly enhanced versions of “tennis club” accounts which make no effective distinction between capital and current expenditure. It would be a major step forward if governments were to limit their deficit-reducing fetish to current spending and receipts and to recognise that capital spending is on assets which, at least, match the funding liabilities incurred and will generate a stream of economic benefits to defray debt service. Most EU countries have a significant shortfall in infrastructure investment, but current policies ensure it won’t be made up.

    Institutional failings abound and are being exploited by powerful special interest groups. The sustained capture of economic rent by these special interest groups is endemic and is doubly debilitating to economies.

    However, what is really exposing the damaging and futile nature of current economic, fiscal and monetary policies and the extent to which they benefit favoured, powerful special interest groups at the expense of the vast majority of citizens is the emergence of Corbynomics in Britain. It will change the economic policy discourse throughout the EU and further afield. But, of course, in Ireland, the powerful vested interest groups – and the armies of advisers, consultants, tame academics, media types and other lackeys they retain – are so deeply entrenched and the various left-wing factions or psuedo left-wing factions are so intent on mutually assured destruction that it is unlikely to have any impact.

  2. Would there have been a eurozone crisis without the global liquidity and subsequent financial crisis?. That started in 2007 and intensified through the following year,leading to the total collapse in liquidity flows from September 2010 to mid-2009.One should also remember that the ECB were tightening policy up to mid-2008. The whole point of EMU was to encourage capital mobility and the flow of liquidity
    As for Ireland, is it true that resources were channeled into consumption?. Surely the evidence points to a surge in investment spending relative to GDP, funded by capital inflows. The consensus view here is that we built too many houses ( is that consistent with the view that we now have too few?) not that we bought too many cars.

  3. Alan Greenspan’s doctrine held that bubbles cannot be prevented and that government’s task is merely to clean up afterward. Greenspan’s practice was to foster one bubble after another,until finally came along one so vast that it destroyed the financial system on the way.
    At it’s source,the global crisis was an American housing crisis,and not one of too little housing but of too much.
    Likewise for the source of the Irish financial crisis. Below is the link to the elementary property valuation error that caused the global financial crisis and that bankrupted Ireland;

  4. “As for Ireland, is it true that resources were channeled into consumption?”

    Well, if you consider increasing ones in-debtedness as ‘consumption’ – then bring it back on! And when is an investment not ‘an investment’? When you mark up an underlying virtual asset to equal the investment fund – and you have a memory problem about devaluing the asset in parallel with your siphoning off of commissions and bonuses – before you securitize the ‘asset’ and sell it on. Nice lunch if you can get it – since someones else are paying for it!

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