Euro Crisis Research Articles

From the economic to the pandemic crisis: The impact upon the EU constitutional architecture—Introduction to the Symposium

Abstract The European Union has evolved significantly, shaped by crises as foreseen by Jean Monnet, who predicted that Europe would be “forged in crises.” Over recent decades, it has faced challenges such as the euro crisis, the COVID-19 pandemic, Brexit, rule-of-law backsliding, and ongoing geopolitical conflicts. These crises have tested and transformed the European Union’s constitutional framework, prompting institutional reforms and innovations in governance without necessarily revising the Treaties. This Symposium explores the European Union’s constitutional evolution through the lens of crises. Key reforms include the reinforcement of budgetary discipline during the euro crisis and the shift toward a stimulus-based approach in response to the pandemic, culminating in the NextGenerationEU framework. Contributors analyze the model of economic governance that has evolved from the convergence of both the economic and pandemic crises, the changing role of regions, the judiciary’s evolving oversight functions and its limits, and rule of law conditionality as a distinctive form of governance. The Symposium will delve into the post-crisis governance landscape of the European Union from a constitutional perspective, focusing on the structural adjustments implemented and their enduring impact. Despite these changes, the European Union has demonstrated resilience and adaptability, forging new governance structures that reflect its deepening constitutional identity. In the end, the Symposium provides a comprehensive examination of these shifts, highlighting how the European Union continues to integrate and innovate in response to ongoing challenges.

Regions and the European Union in times of crisis: A decline of the regional interest?

Abstract The article examines the evolving role of regions in the EU integration process, particularly in light of recent crises, such as the euro and COVID-19 crises. Historically, EU regional studies have emphasized the importance of regions in EU identity and integration, highlighting their role in regional and cohesion policies as key to a multilevel governance system. However, the euro crisis marked a significant shift, as the European Union’s response—focusing on fiscal discipline—curtailed regions’ budgetary autonomy, especially in Southern Europe. In contrast, the COVID-19 crisis prompted a different approach, with the EU relaxing fiscal controls and increasing public expenditure through initiatives like the Recovery Plan for Europe. Despite these measures, the article argues that state interests continue to dominate, sidelining regional voices in the new institutional structures. The article focuses on two critical aspects: the formal participation of regions in EU governance, particularly in the Economic and Monetary Union and the new pandemic-related frameworks, and the impact of these crises on EU regional policy. The findings suggest a decline in regional influence both in institutional participation and in regional policy resources, marking a regression from pre-crisis trends. While the article does not cover a broader multipolicy analysis or the national-level role of regions, it indicates that the post-crisis era has been challenging for regions in maintaining their relevance and influence within the EU framework. The article thus contributes to the discourse on whether the European Union’s interest in regions has diminished, signaling a potential shift in the balance of power within the EU integration process.

Impact of Economic Crises on Banking Sector Performance- A Comparative Analysis of Conventional and Islamic Banks Across OIC Countries

This study investigates the impact of three significant economic crises—the Eurozone Debt Crisis (2010-2012), the COVID-19 Pandemic (2020-2021), and the Post-Pandemic Economic Recovery (2021-2022)—on the performance of conventional and Islamic banks in Organization of Islamic Cooperation (OIC) countries. Using a dataset of 4,381 observations from 34 OIC countries, panel regression techniques are employed to evaluate the influence of these crises on key financial performance metrics: Return on Shareholders' Funds (ROSF), Profit Margin (PM), Return on Total Assets (ROA), Current Ratio (CR), and Solvency Ratio (SR). The analysis reveals that while the Eurozone Debt Crisis did not significantly affect bank performance, the COVID-19 pandemic led to a notable decline in profitability but an improvement in liquidity. The results highlight that during the COVID-19 pandemic, banks faced substantial challenges in maintaining profitability, as evidenced by the significant decrease in PM. However, the improvement in CR suggests that banks enhanced their liquidity management strategies to cope with the crisis. The Post-Pandemic Economic Recovery phase brought positive changes in both profitability and liquidity, demonstrating the ability of banks to adapt and thrive as economic conditions stabilized. Macroeconomic variables, such as GDP growth and inflation, played crucial roles, with GDP growth positively affecting ROSF and inflation negatively impacting PM. These findings underscore the importance of a diversified banking system, including both conventional and Islamic banks, to enhance financial stability. Policymakers and financial regulators should consider the unique strengths of Islamic banking principles in regulatory frameworks and prioritize sound macroeconomic policies to promote stability and resilience in the banking sector. Future research should further explore the long-term impacts of economic crises on bank performance across different regions and banking models, as well as the interaction between regulatory environments and bank resilience. Keywords: Economic crises, bank performance, conventional banks, Islamic banks, OIC countries, COVID-19 pandemic, Eurozone Debt Crisis, post-pandemic recovery, financial stability, macroeconomic factors.

The bright side of the doom loop: Banks’ sovereign exposure and default incentives

The feedback loop between sovereign and financial sector insolvency, termed the “doom loop”, was a key driver of the European debt crisis and motivated an array of policy proposals. This paper revisits the “doom loop” focusing on governments’ incentives to default. We introduce a 3-period model with strategic sovereign default, where debt is held by both domestic banks and foreign investors. The government maximizes domestic welfare; thus, the temptation to default increases with externally-held debt. Importantly, the cost of default arises endogenously from the damage that default causes to domestic banks’ balance sheets. Domestically-held debt thus serves as a commitment device for the government. We show that two prominent policy prescriptions – lower exposure of domestic banks to domestic sovereign debt or a commitment not to bailout banks – can backfire, since default incentives depend not only on the quantity of debt, but also on who holds it. Conversely, allowing domestic banks to buy additional domestic sovereign debt during times of sovereign distress can avert the doom loop. In the context of a monetary union similar unintended negative consequences may arise from a backstop by the central bank (e.g., the ECB’s Transmission Protection Instrument) if imprecisely calibrated or the pooling of debt (e.g., European safe bond, also known as ESBies).

Connectedness and Shock Propagation in South African Equity Sectors during Extreme Market Conditions

This study examined the connectedness and propagation of risk in the South African equity sectors during the Global Financial Crisis (GFC), the European Debt Crisis (EDC), the US–China trade war, and the COVID-19 pandemic. Daily returns of nine Johannesburg Stock Exchange (JSE) super sectors were examined from 3 January 2006 to 31 December 2021. Applying the connectedness matrix and time-varying parameter vector autoregressive (TVP-VAR) model, in full sample and sub-periods, the study showed that dynamic total connectedness of the super sectors is high in absolute form (62%). Furthermore, it was found that the highest volatility connectedness was during the EDC (68.83%) and during the COVID-19 pandemic (68.57%), followed by the GFC (63.16%) and lastly the US–China trade war (42.09%), respectively. This suggests that the tendency for a systemic risk is highest during the EDC, COVID-19, and GFC periods, and lowest during the US–China trade war. The financial sector was the primary net-transmitter of shocks during the COVID-19 period, while the automobile and parts sector was the strongest net-transmitter of shocks during the GFC, EDC, and US–China trade war. Similarly, the strongest net recipient of shocks during GFC, EDC, and COVID-19 is the chemical super sector. The study concludes that there is a significant volatility connectedness among JSE super sectors. In addition, the JSE super sectors exhibit time-varying connectedness during extreme events. Moreover, the net-transmitter and net-receiver of shock do not change significantly during different crisis periods. The policy implications of the findings are highlighted in the concluding section.

Analysis of financial contagion among economic sectors through Dynamic Bayesian Networks

Crises severely impact economies and may spread across regions or sectors in a process called contagion. Understanding this process is crucial for anticipating crises’ effects and implementing mitigative strategies. Specific economic sectors may be major crisis propagators: banking and insurance are often considered decisive in this context. This study employs Dynamic Bayesian Networks to model sectoral interdependencies within the U.S. economy, utilizing daily data from nine Dow Jones industrial indices over the period 2000–2020. As a secondary objective, we evaluate whether the insurance industry plays a central role in spreading crises. Several crisis periods are analyzed, from dot-com bubble to Covid-19 pandemic. The results reveal the subprime crisis, European debt crisis and the 2016 presidential election as the main contagious periods. The last analyzed period – Covid-19 pandemic – was divided in two phases, showing, on phase 1, an interconnected economic system with three main spreaders (Oil & Gas, Real Estate and Pharmaceutical) and, on phase 2, the same configuration of the post-subprime. Furthermore, although the insurance sector was somehow relevant during subprime crisis, it primarily acts as a contagion receptor, specially from the banking sector, with the correlation between them being the highest of all, reaching 0.49 at the last period.

Parallel Currencies under Free Floating Exchange Rates: A Model Setting Out the Conditions for Stable Currency Competition

We use a theoretical model to set up the conditions for a country to attain monetary stability by allowing for two freely tradable currencies to circulate in parallel. For this parallel system to function properly, confidence in the good behavior of the monetary authorities in charge of the two currencies is key. Our model shows how a floating exchange rate between the two can keep the issuers of the local currency in check. The results from our model show the conditions under which a parallel currency system disciplines the issuers of the currencies and thus maintains their purchasing power. In non-volatile economies, it also discourages governments (or private issuers) from inflating one of the currencies as a means to raise seigniorage, as this policy results in the displacement of the currency from the market. When foreign payments shortfall—such as in Greece and Cyprus during the ‘euro crisis’ in the mid-2010s, or intractable hyperinflation—leave the country without a medium of exchange, our model shows how currency choice can restore monetary circulation and offer a path to achieving and maintaining monetary stability.

Merit recruitment, professional advancement opportunities and prosocial rule-breaking among public servants in Greece

Abstract Public servants have a significant impact on peoples’ lives, but we don’t have many reliable estimates of how many employees engage in prosocial rule-breaking (PSRB), a form of constructive deviance. We collected original survey data (N = 497) among a representative sample of Greek public servants and implemented a list experiment to gauge how pervasive PSRB is in Greece’s public sector. Greece is a particularly useful setting in which to study PSRB as the euro crisis created strong reform pressure. We find that public servants who were hired via merit competitions are not less likely to break rules, but this is conditional on their beliefs about career prospects and the fairness of the promotion system. They perceive the professional reward system as biased towards those with political connections and compensate for lack of efficiency by doing favours. This finding raises concerns about the quality of EU reform assessments.

The Real Effects of Zombie Lending in Europe

‘Zombie lending’ occurs when a lender supports an otherwise insolvent borrower. Recent studies document that zombie lending has been widespread following the European sovereign debt crisis. In this paper, I develop a quantitative model to study the impact of these lending practices on firm dynamics. In the model, firm liquidations and zombie lending arise endogenously. The model provides a good match to key euro‐area firm statistics over the period 2011–14. I find that zombie lending has a substantial impact on borrowing costs, helping more low‐productivity firms to survive. This, in turn, causes a drag on aggregate output, investment and productivity.

Inventing and Re-inventing Populism to Protect Europe: The Case of the Italian Partito Democratico, 2007-2022

ABSTRACT Populism has been used by its critics to support European integration. The case of the Italian Partito Democratico (PD) highlights that, as a relatively empty signifier, ‘populism’ affords parties scope to adapt to different circumstances, as evidenced by the evolving use of the term in relation to shifts in policymaking paradigms at the European level. In the period between the Eurozone crisis and the Covid pandemic, the PD changed the connotation of populism in relation to key debates at the European level. While initially the term was used mainly to contrast unproductive uses of spending by the Berlusconi government and then by the M5S-League coalition, the definition of populism narrowed as European support for austerity measures faded. More recently, the PD has started using the term almost exclusively as a synonym for right-wing extremism. The Italian case suggests that critics of populism continuously shift their understanding of the term in order to protect European integration.

Financial Contagion between German and BRICS Stock Markets under Multiscale Scrutiny

We employ wavelet analysis using the maximum overlap discrete wavelet transform (MODWT) to examine the return and volatility interconnectedness between the German equity market (a prominent representative of the Eurozone market) and the BRICS countries over the period 2005–2017. Specifically, we investigate the presence of the pure form of financial contagion in the stock markets of Brazil, Russia, India, China, and South Africa subsequent to the Eurozone Sovereign Debt Crisis (EZDC). Our results indicate the presence of financial contagion between the Eurozone equity market and its counterparts in South Africa and Russia, characterised by co-movement and volatility spillover effects. This contagion is particularly evident at higher frequencies, suggesting that the transmission of shocks occurs rapidly across these markets in the short term. No financial contagion is observed in the Brazilian, Chinese, and Indian stock markets during the European Sovereign Debt Crisis. The absence of financial contagion observed in these three BRICS countries during the European Sovereign Debt Crisis suggests that policymakers in these countries should prioritise addressing idiosyncratic shock channels.

Schramm, Lucas. 2024. Crises of European Integration: Joining Together or Falling Apart? Palgrave Macmillan, Cham. XVII, 303 pp. https://doi.org/10.1007/978-3-031-54748-5.

The book analyses the main factors of European integration crises, taking into account eight major cases from the early 1950s to recent times. The author pays special attention to constitutional crises, the euro crisis and the migration crisis, thus showing that crises have been an integral part of the process of European integration from its very beginning. Although the book does not analyse the current confrontation between Russia and the West, the author argues that European integration began with a serious setback, when member states failed to implement plans to create a European army through the European Defence Community. The global scale and radicality of the ongoing changes allow many researchers to suggest the formation of a new system of international relations. In parallel with these processes, many provisions and phenomena characterizing the system of international relations itself are being revised.

Does the U.S. extreme indicator matter in stock markets? International evidence

We propose a new predictor—the innovation in the daily return minimum in the U.S. stock market (ΔMINUS\\documentclass[12pt]{minimal} \\usepackage{amsmath} \\usepackage{wasysym} \\usepackage{amsfonts} \\usepackage{amssymb} \\usepackage{amsbsy} \\usepackage{mathrsfs} \\usepackage{upgreek} \\setlength{\\oddsidemargin}{-69pt} \\begin{document}$$\\Delta {MIN}^{US}$$\\end{document})—for predicting international stock market returns. Using monthly data for a wide range of 17 MSCI international stock markets during the period spanning over half a century from January 1972 to July 2022, we find that ΔMINUS\\documentclass[12pt]{minimal} \\usepackage{amsmath} \\usepackage{wasysym} \\usepackage{amsfonts} \\usepackage{amssymb} \\usepackage{amsbsy} \\usepackage{mathrsfs} \\usepackage{upgreek} \\setlength{\\oddsidemargin}{-69pt} \\begin{document}$$\\Delta {MIN}^{US}$$\\end{document} have strong predictive power for returns in most international stock markets:ΔMINUS\\documentclass[12pt]{minimal} \\usepackage{amsmath} \\usepackage{wasysym} \\usepackage{amsfonts} \\usepackage{amssymb} \\usepackage{amsbsy} \\usepackage{mathrsfs} \\usepackage{upgreek} \\setlength{\\oddsidemargin}{-69pt} \\begin{document}$$\\Delta {MIN}^{US}$$\\end{document} negatively predicts the next-month stock market returns. The results remain robust after controlling for a number of macroeconomic predictors and conducting subsample and panel data analyses, indicating that ΔMINUS\\documentclass[12pt]{minimal} \\usepackage{amsmath} \\usepackage{wasysym} \\usepackage{amsfonts} \\usepackage{amssymb} \\usepackage{amsbsy} \\usepackage{mathrsfs} \\usepackage{upgreek} \\setlength{\\oddsidemargin}{-69pt} \\begin{document}$$\\Delta {MIN}^{US}$$\\end{document} has significant predictive power and it outperforms other variables in international markets. Notably, ΔMINUS\\documentclass[12pt]{minimal} \\usepackage{amsmath} \\usepackage{wasysym} \\usepackage{amsfonts} \\usepackage{amssymb} \\usepackage{amsbsy} \\usepackage{mathrsfs} \\usepackage{upgreek} \\setlength{\\oddsidemargin}{-69pt} \\begin{document}$$\\Delta {MIN}^{US}$$\\end{document} demonstrates excellent predictive power even during the periods driven by financial upheavals (e.g., Global Financial Crisis and European Sovereign Debt Crisis). Both panel regressions and out-of-sample tests also support the robust predictive performance of ΔMINUS\\documentclass[12pt]{minimal} \\usepackage{amsmath} \\usepackage{wasysym} \\usepackage{amsfonts} \\usepackage{amssymb} \\usepackage{amsbsy} \\usepackage{mathrsfs} \\usepackage{upgreek} \\setlength{\\oddsidemargin}{-69pt} \\begin{document}$$\\Delta {MIN}^{US}$$\\end{document}. The predictive power, however, disappears during the non-financial crisis caused by COVID-19 pandemic, which is originated from the health sector rather than the financial sector. The results provide a new perspective on U.S. extreme indicator in stock market return predictability.

Dynamics of protest mobilisation in the European poly-crisis

ABSTRACT Using an original protest event dataset covering 30 European countries and the period 2000–2021, this paper studies the nature and drivers of protest mobilisation across three major crises that have hit European Member States (the Eurozone, refugee, and Covid crises). Contributing a crisis-comparative perspective to social movement research, we explore crisis mobilisation in three steps. First, looking at general protest trends throughout the past decade, we find that the overall level of protest declined significantly, and especially so after the Eurozone crisis. Second, we characterise crisis-specific protest in terms of the action forms and the actors involved. We find a high involvement of institutional actors in the Eurozone crisis, a high share of radical events in the refugee crisis, and a generally non-confrontational protest organised by civil society actors in the Covid crisis. Finally, we explain crisis-specific protest levels by examining the mobilising effect of grievances. More specifically, we study the impact of problem pressure (how hard countries were affected using economic, migration, and public health indicators) and political pressure from public opinion (the salience of crisis-specific issues) and show that both were important drivers in the three crises.

Fiscal extraction by sovereignty: Calculative bordering and differential entanglement in the Eurozone crisis

The article analyses the relationship between sovereignty and capitalist extraction using assemblage theory. It discusses dialectical variants of assemblage theory as tools to think about the entangled relations that make economic actors. The article proposes two concepts, calculative bordering and differential entanglement, to make sense of processes that responsibilised the Greek government for the 2010s Eurozone crisis and invoked its sovereignty as a tool for extraction value for financial markets. The article contributes to anthropological theorisations of sovereignty by showing how, as a political concept, sovereignty can serve to responsibilize governments to secure accumulation and ensure capitalist extraction. The article thus aims for a refined understanding of the changing relation between extraction and sovereignty and processes of fiscal responsibilization as a performance of sovereignty.

DYNAMIC VOLATILITY SPILLOVERS BETWEEN CURRENCIES OF ASEAN MEMBER COUNTRIES AND CHINA: EVIDENCE FROM TVP-VAR APPROACH

Driven by the importance of analyzing interregional volatility spillover effects, this study investigates dynamic volatility spillovers between the currencies of China– ASEAN Free Trade Area (FTA) member countries by applying the time-varying parameter vector autoregressive (TVP-VAR) connectedness approach to a sample spanning January 1, 2006, to October 31, 2022. The results show that (1) dynamic volatility connectedness varies over time and reaches peaks due to economic events, such as the 2008 global financial crisis (GFC) and the COVID-19 pandemic; (2) the Chinese yuan (CNY) market assumes more of a net receiving role for volatility spillovers after the 811 exchange rate reform, while the Singapore dollar (SGD) market assumes more of a net transmitting role for volatility spillovers in the whole sample period and (3) negative spillovers are dominant during the study period, except during the European debt crisis. Our findings can help China and ASEAN establish an exchange rate coordination mechanism to prevent the cross-country transmission of exchange rate risk.

Measuring the impact of the 2008 and 2011 financial crises and the 2015 recovery on the unemployment rate in Italy

Unemployment rate is one of the most important macroeconomic indicators used by governments for setting economic policy, as it provides worthwhile information on a country's labour market condition, on the health of its economic system and on its future growth. In Italy, since the turn of the century, this indicator steadily decreased until the onset of the 2007–2008 global financial crisis, after which it saw rapid growth that continued in the subsequent years and intensified with the 2011 European sovereign debt crisis. A reversal of this trend occurred only since 2015, after almost eight years of growth, when unemployment rate began a slow decline. Using quarterly data derived from official statistics produced by the Labour Force Survey, this study proposes a counterfactual approach based on interrupted time series analysis to measure the severity of the immediate impact and persistence of the 2008 global financial crisis and the 2011 European sovereign debt crisis on the Italian unemployment rate as well as the intensity of the economic recovery in the years after 2015. Differences across population age sub-groups were considered to highlight the effects on youth unemployment, gender, macro-regions, citizenship and level of education and thus obtain a more in-depth analysis.

Revisiting the economic growth in the shadow of financial stress in times of crisis: evidence from FIGARCH and wavelet coherence approach

PurposeThis study empirically investigates the interdependency of select Asian emerging economies along with the financial stress index during the times of the global financial crisis, the Euro crisis and the COVID-19 period. Moreover, it inspects the long-memory effects of the different crises during the study period.Design/methodology/approachTo address the objectives of the study, the authors apply different statistical tools, namely the adjusted correlation coefficient, fractionally integrated generalised autoregressive conditional heteroskedasticity (FIGARCH) model and wavelet coherence model, along with descriptive statistics.FindingsFinancial stress is having a prodigious effect on the economic growth of select economies. From the data analysis, it is found that the long-memory effect is noted in the gross domestic product (GDP) for India and Korea only, which implies that the volatility in the GDP series for these two nations demonstrates persistence and dependency on previous values over a lengthy period.Originality/valueThe study is unique of its kind to consider multi-segments within the period of the study to get a clear idea about the effects of the financial stress index on select Asian emerging economies by applying different econometric tools.

Investor demand in syndicated EFSF/ESM bond issuances

The European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM) were set up at the peak of the European sovereign debt crisis to issue bonds and lend to countries under current funding stress. This study analyses investor demand in syndicated bond issuances of EFSF and ESM from 2014 to 2020 on an unprecedented granularity level using a dataset of individual orders with statistical inference. Particularly, we investigate orderbook dynamics for three main aspects: first, we determine the main factors segmenting investor demand. Second, we analyse price dynamics in the transactions and their relation to investor demand. Third, we investigate whether any indications of orderbook inflation might explain the increased volatility in orderbook volume. We identify issuance tranche and tenor as the main determinants of investor demand that are largely anticipated in the notional. Further, we note that ESM is doing economical pricing, where the new issue premium tends to be lower in a market context with larger demand. Lastly, we find a mixture of an increasing number and an increasing volume of orders as drivers of large order books. This confirms that there are no indications of orderbook inflation tendencies in the analysed time period.

Agency and structure in the age of European disintegration

This article analyses the causal factors behind the Brexit vote, aiming to contribute to the literature on European disintegration. It addresses how, amidst external factors such as the EU debt crisis and the 2015 refugee crisis, pre-existing ideological forces deeply ingrained in a society can surface and steer a country's trajectory in relation to European integration. Employing a rigorous process-tracing design, it highlights the forces that led to the referendum and its outcome, identifying key patterns that can be extrapolated to comparable cases within the field of EU integration theory. The analysis operates at two levels: it scrutinizes the constraints faced by Cameron's government in the lead-up to the vote, and it probes the British electorate's attitude toward EU and how it was influenced by the Leave campaign. The study draws from an empirical case to identify some of the patterns of this ongoing political process.