Abstract
The Eurozone crisis has been wrongly interpreted as either a crisis of fiscal profligacy or of deteriorating unit-labor cost competitiveness (caused by rigid labor markets), or a combination of both. Based on these diagnoses, crisis countries have been treated with the bitter medicines of fiscal austerity, wage reductions, and labor market deregulation—all in the expectation that these would restore cost competitiveness and revive growth (through exports), while at the same time allowing for fiscal consolidation and private debt deleveraging. The medicines did not work and almost killed the patients. The problem lies with the diagnoses: the real cause of the crisis resides in unsustainable private sector debt leverage, which was aided and abetted by the liberalization of European financial markets and a “global banking glut.”
Highlights
The Eurozone entered a recession in the first quarter of 2008, and quarterly growth rates collapsed in the first quarter of 2009, when the financial crisis hit Europe full-force
Crisis countries have been treated with the bitter medicines of fiscal austerity, wage reductions, and labor market deregulation—all in the expectation that these would restore cost competitiveness and revive growth, while at the same time allowing for fiscal consolidation and private debt deleveraging
The problem lies with the diagnoses: the real cause of the crisis resides in unsustainable private sector debt leverage, which was aided and abetted by the liberalization of European financial markets and a “global banking glut.”
Summary
The Eurozone entered a recession in the first quarter of 2008, and quarterly growth rates collapsed in the first quarter of 2009, when the financial crisis hit Europe full-force.
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