Τhe Euro Area in Crisis, 2008–18
124 Pages Posted: 24 Jul 2019
Date Written: July 1, 2019
This essay provides a broad narrative account of economic and monetary developments in the euro area since the eruption of the Global Financial Crisis (GFC) in 2008 and the resultant changes in the legal and institutional framework of the EMU. The text is organised on a combination of chronological and broad thematic criteria. After a brief description of the euro area’s situation on the eve of the GFC, further developments are set out in four sections, corresponding to the successive permutations, or phases, of the crisis, namely, (a) the gigantic pan-European banking crisis, which erupted in the wake of the Lehman Brothers’ failure as a regional manifestation of the wider GFC, followed by (b) a sovereign debt crisis centred specifically on the countries of the euro area’s periphery such as Greece, Ireland and Portugal, followed by (c) a joint banking and sovereign debt crisis threatening Spain and potentially Italy, finally leading to (d) a long period of tentative financial stabilisation, but excessively low inflation and anaemic macroeconomic performance. While each phase was marked by distinctive symptoms, they are all closely interrelated and should preferably be construed as progressive manifestations of a single disease, whose aetiology relates to the inability of the EMU’s incomplete, imperfect, and inflexible institutional framework to balance and control the financial dynamics unleashed by the euro area’s monetary unification and banking integration. The euro area’s crisis management efforts were thus inherently linked to, and dependent on, profound, and often controversial, institutional reinterpretations, innovations and reforms, including the establishment of country-assistance mechanisms, the revamping of the euro area’s economic governance framework, the introduction of a Banking Union involving the centralisation of banking supervision and resolution in two supranational mechanisms, and, last but not least, the adoption by the ECB of a series of unconventional monetary policy measures.
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