Has the Eurozone Become Less Fragile? Some Empirical Tests

18 Pages Posted: 27 Jan 2015

See all articles by Paul De Grauwe

Paul De Grauwe

CESifo (Center for Economic Studies and Ifo Institute for Economic Research); London School of Economics & Political Science (LSE); Centre for Economic Policy Research (CEPR)

Yuemei Ji

Brunel University London

Date Written: January 26, 2015

Abstract

In this paper we provide empirical evidence documenting the nature of the Eurozone’s fragility. We find that during periods of turmoil, financial markets have tended to impose strong programs of austerity on member countries of the Eurozone. This confirms the evidence we found in a previous paper (De Grauwe and Ji (2013)). In addition we find that the panic-induced austerity, as it occurs mainly during periods of recession, has the effect of reducing the power of the automatic stabilizers in the government budgets, thereby making the economic downturns more intense. We find evidence that this feature has been present in the Eurozone. Our policy conclusion is that the institutional changes that have been introduced in the Eurozone since the start of the sovereign debt crisis are insufficient to safeguard the Eurozone from future crises.

Keywords: Eurozone, austerity, automatic budget stabilizers

JEL Classification: E400

Suggested Citation

De Grauwe, Paul and De Grauwe, Paul and Ji, Yuemei, Has the Eurozone Become Less Fragile? Some Empirical Tests (January 26, 2015). CESifo Working Paper Series No. 5163, Available at SSRN: https://ssrn.com/abstract=2555579 or http://dx.doi.org/10.2139/ssrn.2555579

Paul De Grauwe (Contact Author)

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

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London School of Economics & Political Science (LSE) ( email )

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Centre for Economic Policy Research (CEPR)

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United Kingdom

Yuemei Ji

Brunel University London ( email )

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Uxbridge, Middlesex UB8 3PH
United Kingdom

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