Revisiting the debate on the Eurozone crisis: causes, clustering periphery and core, and the role of interest rate convergence

Abstract

ABSTRACT Explaining the Eurozone crisis requires explaining the origins of the external imbalances until then. The paper divides the literature arguments into three ”fundamental causes”, not mutually exclusive: a competitiveness problem, North-South flows, and excess of public and/or private spending. Within each of these causes, we find divergences between authors in the literature and identify a set of variables correlated with the accumulation of external imbalances before the crisis. These variables help to create clusters of Eurozone countries and separate core countries from the periphery. We then develop an original argument, that the convergence of nominal long-term interest rates in the periphery cluster countries, relative to the core cluster countries, between 1996 and 2007, was the trigger for the three ”fundamental causes” mentioned. We find Granger-causality between this convergence and subsequent (after four quarters) annual variations in the quarterly current account balance.