A Crash Course on the Euro Crisis

Abstract

The financial crises of the last twenty years brought new economic concepts into classroom discussions. This article introduces undergraduate students and teachers to seven of these models: (i) misallocation of capital inflows, (ii) modern and shadow banks, (iii) strategic complementarities and amplification, (iv) debt contracts and the distinction between solvency and liquidity, (v) the diabolic loop, (vi) regional flights to safety, and (vii) unconventional monetary policy. We apply each of them to provide a full account of the euro crisis of 2010-12.

Keywords: Amplification, Euro crisis, financial crisis, Pecuniary externalities, safe asset, shadow banking, systemic risk, teaching

JEL Classification: E44, F32, G01