Lambs to Slaughter: Potential for Crises in Smaller Nations of the European Union

ABSTRACT

The Minsky (1992) model links inflation during economic expansion to the potential for subsequent reversal. This model was tested in the European economic region using logistic regression, which indicated inflation had the greatest contribution toward potential for crisis. Three equations included inflation with other selected macroeconomic indicators tracked by the World Bank. GDP growth, GDP/GNI ratio, and adoption of the Euro demonstrated positive effects. Predictions based on the chosen indicators suggest that the newer members of the European Union may be vulnerable to crisis following periods of high inflation; recent slowing of economic activity in Europe has actually improved the predicted outcomes.

KEY WORDS:

• Economic indicators
• Euro
• financial crisis
• inflation
• logistic regression
• Minsky model

JEL Classification:

• C35
• E31
• E37
• E66

Notes

1. These financial amounts are far less than the economic consequences resulting from high unemployment, subsequent deflation, currency devaluation, and missed opportunities related to poor credit conditions; the numbers are included simply to provide a relative comparison.

2. The coefficient estimates do not vary greatly when insignificant constants are removed for estimation purposes.