Working Paper

Myths, Mix-ups and Mishandlings: What Caused the Eurozone Crisis?

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The Eurozone crisis has been wrongly interpreted as either a crisis of fiscal profligacy or of deteriorating unit-labour cost competitiveness (caused by rigid labour markets), or a combination of both.

Based on these diagnoses, crisis- countries have been treated with the bitter medicines of fiscal austerity, drastic wage reductions, and far-reaching labour 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-sector debt deleveraging. The medicines did not work and almost killed the patients. The problem lies with the diagnoses: the real cause of the Eurozone crisis resides in unsustainable private sector debt leverage, which was aided and abetted by the liberalization of (integrating) European financial markets and a “global banking glut”.

Written for the panel on “The Eurozone Crisis: Fiscal Profligacy or Capital Flows as Final Causes” at the Institute for New Economic Thinking Annual Conference “Liberté, Égalité, Fragilité” in Paris, Saturday April 11, 2015

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