The New Eurozone Risk Morphology
52 Pages Posted: 17 Mar 2019 Last revised: 16 May 2019
Date Written: February 25, 2019
Ten years into the global financial crisis, the euro area is struggling to get back on a path of stability and growth. Leaving aside international factors, the underlying reasons come from within, ranging from the EMU architectural incompleteness to the reluctance to address some key issues, starting from the ECB mandate and the constraints. These reasons develop along two main ‘backbones’ that define the Eurozone risk morphology: large and persistent competitive gaps, which contrast center and periphery, and systematic risk segregation, which hinders any effective progress towards a fiscal union. The present paper analyzes these two ‘risk backbones’ and measures them through appropriate indicators that combine standard macro-economic variables (such as inflation differentials) with financial variables that have become relevant in the post-crisis period (such as sovereign yield spreads and Target2 balances). The critical values of these indicators highlight a matter of (un-)sustainability of the EMU membership, as confirmed by the rising Euro-skeptic debate and redenomination risk. The answer to these problems cannot be limited to a strengthening of the budgetary surveillance and the stability discipline of the private financial sector: it must open to risk sharing between member countries in order to definitively defuse centrifugal forces, remove financial and commercial imbalances, and create the conditions for a fiscal union with a federal budget, an unified debt market and a single finance minister.
Keywords: Competitive Gaps, Real Effective Exchange Rate, Financial REER, Inflation Differentials, Real Sovereign Yield Spreads, Target2, Risk Segregation
JEL Classification: E02, E58, G01, H12, H63
Suggested Citation: Suggested Citation