Post Keynesian view on the Euro crisis

Some abstracts from a paper from the newest issue of Real-World Economics Review. The paper's title is "The euro imbalances and financial deregulation" by Vernengo & Pérez-Caldentey and can be found here: pdf file.

Some abstracts and highlights (italics are mine):

"More precisely, arguing from an aggregate demand perspective, this paper  shows that the crisis in Europe is the result of an imbalance between core and non-core countries inherent to the Euro economic model. Underpinned by a process of monetary unification and financial deregulation core-countries in the Euro Zone  pursued export led growth policies or more specifically ‘beggar-thy-neighbor policies’ at the expense of mounting disequilibria and debt accumulation in the non-core countries or periphery.  This imbalance became unsustainable and this surfaced in the course of the Global Crisis (2007-2008). Unfortunately, due to the fact that in a crisis governments must increase expenditure (even if only through automatic stabilizers) in order to mitigate its impact while at the same time revenues tend to decline (due to output contraction or outright recession), budget deficits are inevitable and emerge as a favorite cause of the crisis itself."

"In the face of a decline in ROA [return on assets] as in the case of non-core countries between 1990-1995 and 1996-2007 or for a roughly constant [return on equity] as in the case of both core and non-core countries between 1996-2001 and 2002-2007,   the levels of profitability (ROE) of the financial system can be maintained or increased by higher levels of leverage (or indebtedness). The levels of leverage were particularly high in some of the core countries. Available evidence on Germany provided by Bloomberg shows that leverage for the major banks increased on average from 27 to 45 between 1996 and 2007. As well data for 2007 for 14 of the major financial institutions of Europe (located in core countries) indicates that the average leverage ratio was 34 (with a maximum of 50).

The freedom of financial flows to move throughout Europe and abroad, low borrowing costs and easy access to liquidity via leveraging coupled with no exchange rate risk provided a false sense of prosperity in a low risk environment."

[Figure 2 basically shows how aggregate demand was maintained in the periphery countries by investment instead of exports-led growth as in the core countries. That investment was financed with bank-debt, from e.g. Germany and France, and caused furthermore a current account deficit in the periphery countries that had to be corrected sooner or later due to balance-of-payments constraints, see figure 3 below. Notice in figure 3 that the current account was never in the positive zone in the peripheries after the adoption of the Euro on interbank markets in 1999.]

[Germany goes through the 60% public debt wall in 2002.]

"Imbalances in a Monetary or Currency Union are bound to occur when its state members are economically heterogeneous and different.  Recognition of this fact requires  that the establishing Union must create as part of its constituent charter mechanisms to solve and clear the imbalances rather than making them cumulative over time as in the case of the Euro Zone. In practice this amounted to recycle balances from surplus to deficit countries to maintain the dynamics of aggregate demand. This implies that the creditor country should play an active role as part of an equilibrating mechanism [aka. fiscal transfers between countries] and that the brunt of the adjustment  should not be borne by the debtor country which happens to be the weaker and less developed country."