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CF Weekly Workshop - Macroeconomic Imbalances and the Eurozone Crisis, by Erik Jones

When Jun 12, 2012
from 05:00 PM to 06:00 PM
Where Barbara White Room, Newnham College
Contact Name
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'Macroeconomic Imbalances and the Eurozone Crisis'


The euro is probably the only currency in the world that was created by economists thinking about the theory of optimum currency areas.  Nevertheless, it seems headed for disaster.  The purpose of this presentation is to explain why that is so.  The argument is that financial integration in a monetary union without a common ‘risk-free’ asset, deposit insurance, prudential oversight, and bank resolution program was fundamentally unstable.  The project started out well enough, as savings flowed from relatively mature industrial economies at the core of Europe to those on the periphery with more opportunities for investment and development.  But as the flow off savings accumulated into stocks of investment, they tended to push up prices on the periphery while holding down inflation at the core.  Over time, peripheral industries became dependent upon low interest rates and ready liquidity to maintain profitability and peripheral banks became dependent upon access to international interbank markets to service their assets.  This combination of factors created fragility in the face of external shocks for the monetary union as a whole.  Once investors became worried about the competiveness of peripheral economies and the solvency of peripheral banks, they began to liquidate their stocks of assets on the periphery in order to bring their savings back home.  This flight to quality created an interest rate shock that acted as a self-fulfilling prophecy by undermining the profits of firms on the periphery and eating into the capital buffers of peripheral banks.  Efforts by peripheral governments to shore up their national banking systems only succeeded in making matters worse by calling public finances on the periphery into question as well.  The result was a negative spiral on the periphery that increased the flight to quality from the peripheral countries to the core.  As the crisis deepened, Europe’s heads of state and government faced a stark pair of alternatives: either they must implement a financial union or they must accept that the euro would fail.

Erik Jones, Professor of European Studies, Johns Hopkins SAIS
Director, Bologna Institute for Policy Research
Senior Research Fellow, Nuffield College, Oxford

Erik Jones received his BA (AB) at Princeton University, and his MA and PhD at Johns Hopkins SAIS. As an academic, he has worked at the Centre for European Policy Studies, the Central European University, the University of Nottingham, and most recently the Johns Hopkins Bologna Center. For the period from 2011 to 2013, he is a Senior Research Fellow at Nuffield College in Oxford.

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