Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/79483
Authors: 
Bibow, Jörg
Year of Publication: 
2012
Series/Report no.: 
Working Paper, Levy Economics Institute 721
Abstract: 
This paper investigates the causes behind the euro debt crisis, particularly Germany's role in it. It is argued that the crisis is not primarily a sovereign debt crisis but rather a (twin) banking and balance of payments crisis. Intra-area competitiveness and current account imbalances, and the corresponding debt flows that such imbalances give rise to, are at the heart of the matter, and they ultimately go back to competitive wage deflation on Germany's part since the late 1990s. Germany broke the golden rule of a monetary union: commitment to a common inflation rate. As a result, the country faces a trilemma of its own making and must make a critical choice, since it cannot have it all - perpetual export surpluses, a no transfer / no bailout monetary union, and a clean, independent central bank. Misdiagnosis and the wrongly prescribed medication of austerity have made the situation worse by adding a growth crisis to the potpourri of internal stresses that threaten the euro's survival. The crisis in Euroland poses a global too big to fail threat, and presents a moral hazard of perhaps unprecedented scale to the global community.
Subjects: 
Euro
Monetary Union
Banking Crisis
Balance-of-Payments Crisis
Sovereign Debt Crisis
Competitiveness Imbalances
Fiscal Transfers
Bailouts
Austerity
JEL: 
E42
E52
E58
E65
F36
G01
Document Type: 
Working Paper

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