Crisis in the Euro Zone

At the outbreak of the current financial crisis many European commentators and politicians took it to be an essentially Anglo-Saxon affair. The euro zone was taken to be, in effect, a victim of ‘collateral damage’ from the fallout of a crisis manufactured elsewhere. The financial systems of core euro-zone countries were held to be fundamentally different from Anglo-Saxon ones and thereby less vulnerable to systemic risks, although there had been a shift towards more capital market-based financial systems amongst European economies. The core euro-zone countries had not seen house price booms on US or UK levels and associated consumption growth; with greater provision of social housing there was not the same expansion of subprime lending. Nor had European countries run major external deficits — overall the euro zone was in approximate balance, with Germany running a clear surplus, and most of the member countries’ trade was conducted with each other. Indeed, the European Commission (2009, p. 48) recently asserted that ‘Overall, the role of the euro area in global imbalances was negligible until the crisis broke’, rather overlooking the role of Germany’s large current account surplus.