Who’s Afraid of the Big Bad Wolf? Rethinking the Core and Periphery in the Eurozone Crisis

ABSTRACT

Recent literature on the eurozone crisis has begun to rethink those explanations of its origins that rely on narratives stressing the ‘immaturity’ of political and economic governance in the countries of the European periphery. These narratives are typically challenged by frameworks which understand the eurozone as a region characterised by a ‘beggar-thy-neighbour’ hierarchy between the economic growth of Germany, which leads to precarious, ‘financialised’ growth in the periphery. Yet, this article shows that core–periphery scholarship is unable to adequately challenge the immaturity thesis due to its preoccupation with German ‘victimisation’ of the European periphery. By exploring country-specific direction of trade and capital lending statistics, I shows that there is little basis for the argument that Germany is to blame for the origins of the eurozone crisis in the individual countries of the European Periphery. This article shows that by bringing core–periphery analysis into dialogue with Comparative Political Economy, a critical approach to the Eurozone crisis can be developed which leaves behind the myth of the German ‘big bad wolf’. Instead, I show that imbalances between the core and periphery are a product of a flawed construction of the Single Market and Economic and Monetary Union.

KEYWORDS:

• Eurozone crisis
• Germany
• European periphery
• core–periphery
• Greece
• Ireland
• Portugal
• Italy
• Spain
• Comparative Political Economy

Acknowledgements

I would also like to thank Paul Taggart, Rebecca Adler-Nissen, Andreas Antoniades, Kimberly Hutchings, Beate Jahn, Nikolay Rostov, and Umut Aydin for their kind and generous comments on earlier drafts and versions of this paper. I would also like to thank Fabio Petito and Kevin Gray for their guidance and support, and Jennifer Mc Guill and Colin Dooley for their valuable assistance at various stages of the writing of this article. All remaining errors and shortcomings are entirely my own.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes on contributor

Neil Dooley is a Lecturer in Politics in the Department of Politics at the University of Sussex, where he teaches European Union Politics and International Political Economy. He has held previous positions at the Department of International Relations, University of Sussex (where he also obtained his doctorate in International Relations). His articles have appeared in Millennium: Journal of International Studies, Third World Thematics: A TWQ Journal and his first book The European Periphery and the Eurozone Crisis is forthcoming with Routledge’s RIPE Series in Global Political Economy in 2018.

ORCID

Neil Dooley http://orcid.org/0000-0001-5800-1290

Notes

1 An unfortunate acronym for the ‘bailed out’ countries: Portugal, Ireland, Italy, Greece, and Spain.

2 See Magone (2004), Diamandouros (2011), and Manolopoulos (2011), and for critical overviews see Lyberaki and Tsakalotos (2002), Becker and Jäger (2012), and Papadimitriou and Zartaloudis (2014, 93, 95).

3 Deeming it offensive, the Financial Times actually banned use of the acronym ‘PIIGS’ in its publications (Mackintosh 2010) as did Barclays Capital (Alloway 2010).

4 See Elliott et al. (2013) and Independent Evaluation Office of the International Monetary Fund (2016).

5 Different typologies of the ‘core’ exist. In this paper I adopt Lapavitsas et al.’s list: Germany, France, Belgium, and the Netherlands.

6 See Matthijs and Blyth (2011), Dullien and Guérot (2012), Moravcsik (2012), Bulmer and Paterson (2013), Thompson (2013), Jacoby (2015), and Newman (2015).

7 See also Paterson (2011), Bulmer and Paterson (2013), and Matthijs and Blyth (2015).

8 Furthermore, the three strands tend not to talk much to each other. As an indication, Lapavitsas et al. (2012) are not cited a single time in Thompson (2013), Matthijs (2016a), or Bulmer and Paterson (2013), and even more remarkably, not a single publication from the above authors are cited in Flassbeck and Lapavitsas (2015).

9 See Goetz and Dyson (2003), Lapavitsas et al. (2012: 3–5), Beck (2013), and Matthijs (2016b).

10 On design flaws, see Scharpf (2011), Papadimitriou and Wray (2012: 2–3), De Grauwe (2013: 6–7), and Panico and Purificato (2013).

11 It is also worth noting that while the analysis of Lapavitsas et al. (2012), Flassbeck and Lapavitsas (2015) focuses on the relationship between the core (Germany, France, Belgium, and the Netherlands) and the periphery, it is Germany that ends up being the primary focus. This is evidenced, inter alia, by chapter headings in Flassbeck and Lapavitsas most recent work like ‘Germany as the Source of the Eurozone crisis’ (2015, 21–38), not ‘Core EMU as the Source of the Eurozone crisis’, and the preoccupation with German wage moderation in Flassbeck and Lapavitsas (heated) exchange with Storm (2016). While it would be unfair to say that the distinction between the core and Germany has been imprecise, Germany’s role in generating current and capital account imbalances is the one that steals the headlines in this literature. As I show in section two, this distinction between the core and Germany matters, as it has implications for how valid it is to blame the German ‘big bad wolf’ for the eurozone crisis’.

12 As I note in section three, this approach does not typically make a distinction between sheltered and non-sheltered sectors of the economy. As Hopkin (2015) notes, inflation in the periphery tended to come from the sheltered not for export sector.

13 See Storm and Naastepad (2015), Storm (2016) for more extensive account of this critique.

14 Lapavitsas et al. (2012) consider Germany, France, Belgium, and the Netherlands as the ‘core’. As per the suggestion of an anonymous peer reviewer, I have also included the cases of Finland, Austria, and Luxembourg.

15 Because these countries are deficit countries, there is no overall trade surplus for the periphery to contribute to. Accordingly, positive trade balances are represented as percentages of total world exports, rather than as percentages of world surplus.

16 Of course, Germany benefitted from a weakened euro and increased demand from emerging markets. I thank an anonymous peer reviewer for stressing the importance of this point.

17 The Multi-Fibre Arrangement was an international trade agreement on textile and clothing which imposed quotas on the amount that developing countries could export to developed countries.

18 Including some emblematic projects such as a large car plant – see European Commission Directorate-General for Economic and Financial Affairs (2004: 24).

19 See the infamous ‘Trichet letter’ to the late Finance Minister, Brian Lenihen (Irish Times 2014).

20 It is worth noting that the case of Spain, at face value, does appear to support Lapavitsas et al.’s (2012) claim. Yet, and although there is not the space to go into the case in any detail, Spain’s trade deficit stemmed more from an increase in imports brought about by a housing bubble (similar to Ireland), while export performance remained stable over the period of its euro membership (see Kang and Shambaugh 2013: 14). German ‘victimisation’ tells us little about Spain’s crisis.

21 As Milios and Sotiropoulos (2010) do, in spite of their critique of a ‘beggar-thy-neighbour’ core–periphery explanation.

22 These figures are calculated using data from the Bank of International Settlements (BIS) consolidated banking statistics. This data set provides information regarding banks’ on sheet financial claims vis-à-vis the rest of the world and provides a measure of the risk exposures of lenders’ national banking systems. This data set was chosen as Lapavitsas et al. (2012: 46–47) and Thompson (2013: 8) use BIS consolidated banking statistics to support their argument regarding the importance of core lending to the periphery. The time frame (2005–2009) was selected as BIS Consolidated Statistics do not contain data for ultimate risk basis before 2005, and Lapavitsas et al. (2012) use the same time period.

23 The case could be made that the ultimate source of Portuguese debt, indirectly, is Germany and France via Spain. However, rather than contort these relationships further into the core–periphery model (why would Germany indirectly lend to some peripheral states while directly lending to others?), I suggest that it makes more sense to take the specificities of financialisation in each state more seriously.

24 Of course, the division between causes and responses is somewhat murky, because the problematic response to the crisis is a big part of the origin story. Nevertheless, we still need an understanding as to why the European periphery got into difficulty in the first instance.

25 See Hancké (2009: 5–17), Clift (2014), Bruff and Ebenau (2014), and Coates (2005) for some up to date critical reviews.

26 Lapavitsas et al. (2012: 22–28) make an argument that is very close to Johnston, but crucially, they do not recognise that wage rises tend not to emerge in the non-sheltered for-export sectors – as these already faced external market pressures to remain competitive. Rather rises in wage costs and inflation emerged from the sheltered sector of the economy – where there was less pressure for wage moderation (Hopkin 2015: 175).

27 Although there is not space for a more detailed engagement with this approach, see Jones (2015, 2016), Storm and Naastepad (2015) and Storm (2016) for an in-depth summary with evidence.

28 I thank an anonymous peer reviewer for this point.

29 See especially Engelen et al. (2010) who combine Varieties of capitalism literature with insights from ‘financialisation studies’ in order to explain different geographies of financialisation in the USA, Germany, and the Netherlands.

30 Lapavitsas and Powell (2013) have made this very point in reference to USA, UK, Germany, France, and Japan.

31 This draws on the more extensive account of Portugal’s financialisation in Dooley (2017).