The Effects of Sudden Stops During the Eurozone Crisis

Abstract

The liberalization of the capital account of the balance of payments was one of the main reasons of the increasing amount of capital flows that came in into many emerging economies. In the last decades, the restrictions on these capital movements have been eliminated and the world has witnessed the creation of a liberalized environment. The inflowing of capitals brought many positive welfare implications for the borrowing countries and for their economies. But in the world of high capital mobility, sudden stops of capital inflows may occur, typically triggering financial crises. The latest financial crisis in the euro zone seems to support this point of view. This paper analyses capital flow bonanza to EZ periphery and the role of large capital inflows in generating the EZ crisis. The findings in this paper show that the crisis in the EZ has not occurred only as a result of fiscal indiscipline of some member states, as it is usually believed, but have also been a result of external, systemic reasons, such as the large capital flows. Also we recommends some measures of economic policy, which could act as prevention in a situation of reappearance of great capital inflows in the EZ periphery.