37 Pages Posted: 26 Mar 2011
Date Written: September 8, 2010
The crisis in Greece and other mainly Southern euro zone countries has been discussed primarily as a fiscal issue. Current account deficits of the same countries have received less attention in spite of the relatedness of current account and fiscal deficits. We argue that the failure of many countries within the euro zone to develop adequate internal adjustment mechanisms is also an important a factor behind the crisis. After reviewing the major perspectives that have been offered on the crisis, we present data that supports our argument by demonstrating the lack of price and cost convergence in the euro zone since 1999. Ironically, it seems that the surplus countries have carried out more of the adjustment pointed to by the endogenous Optimum Currency Area theory than the deficit countries. We recommend that the responsibility of a “European Debt Surveillance Authority” should include surveillance of intra-euro payment flows, imbalances and adjustment in labor and goods markets, and setting benchmarks for the euro zone guarantees of sovereign debt based on ability to adjust internally. Thereby, a potential moral hazard problem of an implicit euro zone guarantee of countries’ sovereign debt could be avoided.
Keywords: financial crisis, Euro currency, international debt
JEL Classification: F30, F36, F34
Suggested Citation: Suggested Citation
Wihlborg , Clas and Willett, Thomas D. and Zhang, Nan, The Euro Crisis: It Isn't Just Fiscal and it Doesn't Just Involve Greece (September 8, 2010). Claremont McKenna College Robert Day School of Economics and Finance Research Paper No. 2011-03. Available at SSRN: https://ssrn.com/abstract=1776133 or http://dx.doi.org/10.2139/ssrn.1776133