The Eurozone crisis: Fiscal fragility, external imbalances, or both?

by Pietro Alessandrini, Michele Fratianni, Andrew Hughes Hallett & Andrea Presbitero

Vox
May 16, 2012

Unsustainable debt along Europe’s periphery is bringing the euro to breaking point. But this column argues that this is not simply the result of fiscal ill-discipline. After 2010, the Eurozone crisis went from a fiscal crisis to a balance-of-payments crisis – with different prescriptions for policy.

The speculative attack against Eurozone sovereign debt, reflected in the extraordinary rise in the yields of government bonds for Greece, Ireland, Italy, Portugal, and Spain (known affectionately as the GIIPS) since the start of 2010, has sparked a heated policy debate on how best to stabilise the Eurozone (see the Vox debate moderated by Corsetti 2012). Two main views have emerged:

• The ‘German’ view, which prescribes the necessity of fiscal austerity in the south of the Eurozone to lessen the risk that the south may be forced to abandon the euro.

This view represents now the prevailing regime and it is justified by the claim that southern countries have been fiscally irresponsible and have failed to implement supply-side policies (Von Hagen et al 2011).

• The Keynesian view, according to which the Eurozone sovereign debt crisis is viewed as being a balance-of-payments crisis, with the Eurozone north benefiting from surpluses and the Eurozone south suffering from deficits (Blanchard 2007; Merler and Pisani-Ferry 2012).

This interpretation argues that the current emphasis on fiscal austerity risks of being counter-productive, given its negative impact on expected long-term growth rates (DeLong and Summers 2012).

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