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Why is it so Difficult and Complex to Solve the Euro Problem?

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  • Burak Saltoðlu
  • Devrim Yýlmaz

Abstract

This paper discusses the complexities and challenges in finding a stable long-run solution for the Eurozone crisis. We first discuss the macroeconomic and structural differences among North and South European countries. Focusing on trade, labour productivity and balance of payments data, we show that periphery’s current account deficits are endemic and closely follow economic growth. Our analysis suggests that while German stagnant wage policy might have contributed to the building up of imbalances within the Eurozone to an extent, monetary policy by ECB, deficit-dependence of growth in Southern Europe and the cheap-credit environment of pre-crisis period also played major roles. In addition, we analyze the feasibility of policy proposals for saving the Eurozone, evaluating potential costs/benefits and reviewing the pros and cons of the newly established European Banking Union. We conclude that since the problems in Southern Europe are structural, an active industrialization policy in these countries and a partial fiscal union are essential for a sustainable long-run solution. Furthermore, the Banking Union as it is, is far too immature to have a quick impact on the problem. The costs of the necessary long-lasting reforms and regulations in the Eurozone can exceed short-run benefits. Therefore, a strong political will power with less attention to the short run benefits is necessary for a successful recovery.
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  • Burak Saltoðlu & Devrim Yýlmaz, 2013. "Why is it so Difficult and Complex to Solve the Euro Problem?," Working Papers 2013/02, Bogazici University, Department of Economics.
    • Handle: RePEc:bou:wpaper:2013/02
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