The Eurozone Debt Crisis - A Simple Theory, Some Not So Pleasant Empirical Calculations and an Unconventional Proposal

33 Pages Posted: 8 Jun 2010 Last revised: 17 Jun 2010

Rainer Maurer

Pforzheim University

Date Written: June 5, 2010

Abstract

This paper explains the eurozone debt crisis as the result of self-reinforcing debt-spirals, which were caused by different inflation rates across the EMU member states. According to this view, the current crisis is not the result of a speculative attack but of a design faulty of the EMU. The data presented support this view. Time series of government budget and current account surpluses are calculated, which are compatible with constant debt-to-GDP ratios. The results show that the situation has become critical for countries like Greece, Portugal, Spain and Ireland significantly before capital markets started to demand higher interest rate spreads. The results indicate furthermore that capital markets react more sensitive towards high international net debt-to-GDP ratios than towards high government debt-to-GDP ratios. Given this empirical background, a discussion of various short-run policy options does not lead to very encouraging results. It is argued, that any future EMU needs to provide its central bank instruments to deal with country-specific business-cycle shocks.

Keywords: EMU, debt-crisis, eurozone, central bank policy, monetary unions, optimal currency areas, ECB, Greece, Ireland, Spain, Portugal

JEL Classification: E52, E58, E62

Suggested Citation

Maurer, Rainer, The Eurozone Debt Crisis - A Simple Theory, Some Not So Pleasant Empirical Calculations and an Unconventional Proposal (June 5, 2010). Available at SSRN: https://ssrn.com/abstract=1621828 or http://dx.doi.org/10.2139/ssrn.1621828

Rainer Maurer (Contact Author)

Pforzheim University ( email )

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