The impact of the twin financial crises

Abstract

We focus on the first 20 years of the Euro, from 1999 to 2019, and we split this period into two approximate decades to examine the performance of three benchmarks: the real GDP quarterly growth, the annualized real per capita GDP changes and unemployment. These illustrate that the underperformance of Europe is more evident during the second decade. Searching for causes we find that the Global Financial Crisis was an exogenous shock to the EU but its impact was large in both the U.S. and the EU. One major reason is that the U.S. responded quickly and aggressively both fiscally and via an unconventional monetary policy. The Euro area was constrained by a European Central Bank that focused on price stability, and fiscal policy was not much of an option. The second shock of the Sovereign Debt Crisis was endogenous to the Euro area and it, more than the Global Financial Crisis, revealed the original weaknesses and fragility of the European monetary union. This financial fragility quickly translated into declines in aggregate demand and economic underperformance.