This paper analyzes the Euro crisis in light of the experience of center-periphery relations over the last 40 years of renewed financial globalization.
The crisis shows the characteristic pattern evident in so many other crises in the developing world: i.e. “boom” and “bust” phases of cross-border financial flows of massive magnitude, dominated by “push” factors from the center. Financial institutions at the center play a crucial role. The “boom” phase leads to serious imbalances in the peripheral economies - losses of competitiveness among them -ending in a “sudden-stop” that poses acute problems for the overexposed creditors, which then turn to their own governments for bailouts.
The paper shows that “center” creditor institutions largely fund themselves in international financial markets so that their lending – providing purchasing power to finance spending – has little to do with country to country transfers of savings. When the “sudden-stop” arrives the problem therefore is not that of returning savings to the poor depositors in those institutions but of extricating them from their large exposure to borrowers in difficulties in the “periphery”. A “triangular bail-out” process, a “revolving-door” strategy, has become conventional under which instead of governments in the center openly bailing out their financial houses, official institutions provide some fraction of the debt service to borrowing governments in the form of new debt, for them to add to the extremely demanding burden of fiscal surpluses – arising from deflationary austerity policies – needed to avoid having to register as “non-performing” a menacing volume of credits “outstanding”.