The Crisis in the Euro Zone : Did the Euro Contribute to the Evolution of the Crisis?

The simmering sovereign debt crisis in the Euro Zone represents a looming threat to the recovery of the world economy and could lead to a renewed global financial crisis. The purpose of this paper is to analyze the root causes of the crisis in Euro...

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Bibliographic Details
Main Authors:	Lin, Justin Yifu, Treichel, Volker
Format:	Policy Research Working Paper
Language:	English en_US
Published:	World Bank, Washington, DC 2012
Subjects:	ACCOUNTING ADVERSE SHOCKS AGGREGATE DEMAND AMOUNT OF CREDIT ANNUAL GROWTH ASSET CLASSES ASSET PRICES BAILOUT BALANCE OF PAYMENTS BALANCE OF PAYMENTS CRISIS BALANCE SHEET BALANCE SHEETS BANK BORROWING BANK DEPOSITS BANK FOR INTERNATIONAL SETTLEMENTS BANK HOLDINGS BANK LENDING BANK LIQUIDITY BANK POLICY BANKING CRISIS BANKING SECTOR BANKING SYSTEM BANKING SYSTEMS BASIS POINTS BILATERAL TRADE BILLS BOND BONDS BORROWING COSTS BUDGET DEFICIT BUDGET DEFICITS BUSINESS CYCLE CAPITAL ACCOUNT CAPITAL ACCOUNT LIBERALIZATION CAPITAL ACCOUNT TRANSACTIONS CAPITAL CONTROLS CAPITAL FLOWS CAPITAL INFLOWS CAPITAL REQUIREMENTS CENTRAL BANK COMMERCIAL BANK COMMERCIAL BANK LOANS COMMERCIAL BANKS COMMON CURRENCY COMPETITIVE EDGE CONSOLIDATION CORE INFLATION CREDIBILITY CREDIT BOOM CREDIT BOOMS CREDIT DERIVATIVES CREDIT EXPANSION CREDIT EXPOSURE CREDIT QUALITY CREDIT WORTHINESS CURRENCY CURRENCY RISK CURRENCY UNION CURRENCY UNIONS CURRENT ACCOUNT CURRENT ACCOUNT BALANCE CURRENT ACCOUNT DEFICIT CURRENT ACCOUNT DEFICITS CURRENT ACCOUNT IMBALANCES CURRENT ACCOUNT POSITIONS CURRENT ACCOUNT SURPLUS DEBT BURDEN DEBT CRISIS DEBT SUSTAINABILITY DEBTS DEFAULTS DEPOSIT DEPOSIT MONEY BANKS DERIVATIVES DISPOSABLE INCOME DOMESTIC CONSUMPTION DOMESTIC DEMAND DUTCH DISEASE EARNING ASSETS ECONOMIC CONTRACTION ECONOMIC CRISIS ECONOMIC GROWTH ECONOMIC POLICY EMERGING MARKETS EQUITY MARKET EURO ZONE EUROPEAN CENTRAL BANK EXCHANGE RATE EXCHANGE RATE FLUCTUATIONS EXCHANGE RATE RISK EXPENDITURE INCREASES EXPORT COMPETITIVENESS EXPORT GROWTH EXPORT MARKET EXPORT PERFORMANCE EXPORTER EXPOSURES EXTERNAL BALANCES EXTERNAL COMPETITIVENESS EXTERNAL DEBT EXTERNAL INDEBTEDNESS EXTERNAL POSITION FINANCES FINANCIAL CONTAGION FINANCIAL CRISIS FINANCIAL DEEPENING FINANCIAL FLOWS FINANCIAL INSTABILITY FINANCIAL INSTITUTIONS FINANCIAL INSTRUMENTS FINANCIAL INTEGRATION FINANCIAL LIBERALIZATION FINANCIAL MARKET FINANCIAL MARKETS FINANCIAL OPENNESS FINANCIAL SERVICES FINANCIAL STABILITY FINANCIAL STUDIES FINANCIAL SYSTEM FISCAL BALANCES FISCAL DEFICIT FISCAL DEFICITS FISCAL DISCIPLINE FISCAL POLICIES FISCAL POLICY FISCAL POSITION FOREIGN ASSETS FOREIGN BANK FULL LIBERALIZATION GOVERNMENT DEBT GOVERNMENT DEFICIT GOVERNMENT DEFICITS GOVERNMENT EXPENDITURE GOVERNMENT REVENUE GOVERNMENT SPENDING GROWTH PERFORMANCE GROWTH RATE GROWTH RATES HOLDING HOUSING HOUSING PRICES INDEBTED COUNTRIES INDEBTEDNESS INFLATION INFLATION RATES INTEREST RATE INTEREST RATES INTERNATIONAL BANK INTERNATIONAL CAPITAL INTERNATIONAL CAPITAL MARKETS INTERNATIONAL ECONOMICS INTERNATIONAL INVESTMENT INTERNATIONAL SETTLEMENTS INTERNATIONAL TRADE JUDICIAL INDEPENDENCE LENDER LEVERAGE LEVY LIQUIDITY LIQUIDITY RISKS LOAN LONG-TERM BOND YIELDS LOSS OF COMPETITIVENESS MARKET SHARE MARKET SHARES MARKETABLE SECURITIES MONETARY FUND MONETARY POLICY MONETARY UNION MORTGAGE MORTGAGE LOANS MORTGAGE MARKET MORTGAGE MARKETS NATIONAL CURRENCIES NON PERFORMING LOANS NONPERFORMING LOANS OPTIMUM CURRENCY AREAS POLITICAL ECONOMY POOR ASSET QUALITY PORTFOLIO PRICE INCREASES PRIVATE CONSUMPTION PRIVATE CREDIT PRIVATE INVESTMENT PRIVATE SECTOR BANKS PROFITABILITY PROPERTY INVESTMENT PUBLIC DEBT RATE OF RETURN REAL APPRECIATION REAL EFFECTIVE EXCHANGE RATE RECESSION REGULATORY AUTHORITIES RISK AVERSION RISK MANAGEMENT RISK MANAGEMENT TOOLS RISK PROFILE RISK TRANSFER SHARE OF ASSETS SHORT-TERM DEBT SINGLE CURRENCY SOLVENCY SOVEREIGN DEBT STAMP DUTIES STANDARD DEVIATION STOCK MARKET STRUCTURAL REFORMS SUPERVISION OF BANK SUPPLY OF CREDIT SURPLUSES TAX TAX INCREASES TRADE SURPLUS TRADE UNIONS WAGES WEALTH EFFECT WORLD ECONOMY
Online Access:	http://documents.worldbank.org/curated/en/2012/08/16607788/crisis-euro-zone-euro-contribute-evolution-crisis http://hdl.handle.net/10986/12017

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Summary:	The simmering sovereign debt crisis in the Euro Zone represents a looming threat to the recovery of the world economy and could lead to a renewed global financial crisis. The purpose of this paper is to analyze the root causes of the crisis in Europe and assess the extent to which it was driven by the global financial crisis and by factors internal to Europe, notably the adoption of the common currency. Adoption of the euro led to convergence of interest rates in periphery countries to the levels in core countries and, in combination with rising capital inflows owing to greater financial integration, set off a consumption and real estate boom in periphery countries, leading to higher growth and increases in government revenue and spending. The resulting real appreciation led to a loss of competitiveness in periphery countries, adversely affecting export performance and causing rising current account imbalances. While the fiscal position remained manageable before the crisis owing to rising revenue, the recession brought about by the global financial crisis led to the burst of real estate bubbles and a financial sector crisis and to sharply increased budget deficits and worsened debt indicators and triggered the sovereign debt crisis. Core countries, in particular Germany, maintained a competitive edge through wage restraint allowing them to increase exports to periphery countries, while their banks profited from increased lending to non-core countries. In sum, the euro exacerbated intra-European imbalances whose unsustainability became evident in the aftermath of the global financial crisis and triggered the current sovereign debt crisis.

The Crisis in the Euro Zone : Did the Euro Contribute to the Evolution of the Crisis?

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