The Eurozone Between Austerity and Default

C. Lapavitsas, A. Kaltenbrunner, G. Lambrinidis, D. Lindo, J. Meadway,
J. Michell, J.P. Painceira, E. Pires, J. Powell, A. Stenfors, N. Teles

Executive Summary
The causes of peripheral country indebtedness:
EMU membership and private sector deficits
1. The turmoil in the Eurozone is due to the global crisis of financialisation that broke out in 2007. But it is also due to the biased nature of the European Monetary Union (EMU). Systematic pressure on labour has intensified the disparities of competitiveness among Eurozone members, splitting the Eurozone into core and periphery.
2. The periphery includes Spain, Portugal and Greece. It also includes Ireland, which is subject to the same pressures as the other three but has several peculiar economic features that call for separate analysis. The periphery has been unable to compete against the core, while being constrained by uniform monetary policy and rigid fiscal discipline. Thus it has registered current account deficits, mirroring the current account surpluses of the core, above all, Germany.
3. Current account deficits in general must be financed by capital flows from abroad. The latter can be either debt-creating, e.g., bank loans or portfolio flows, or non-debt-creating, e.g., foreign direct investment. Furthermore, current account deficits correspond to financial deficits by the public and the private sector.
4. In the periphery, the Stability and Growth Pact has prevented the public sector from registering systematic financial deficits. Consequently, current account deficits have corresponded largely to private sector financial deficits. Furthermore, current account deficits were financed overwhelmingly by bank lending from the core.
5. In short, peripheral country indebtedness is largely due to the behaviour of the private sector in the course of EMU. Unable to compete against the core, peripheral private sectors have generated large financial deficits. Consumption was boosted in all three countries, while a real estate bubble emerged in Spain. Capital flows from abroad – typically lending by core banks – provided finance. Furthermore, the domestic financial system found the opportunity to expand, thus increasing domestic financialisation and indebtedness. The result has been the accumulation of vast debts, partly external (and owed to the core), partly domestic (reflecting internal financialisation).

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