Sovereign Debt or Balance of Payments Crisis? Exploring the Structural Logic of Adjustment in the Eurozone

Abstract

This paper provides an alternative interpretation of the euro crisis to the dominant sovereign debt narrative. I argue that at the core of the euro crisis is a balance of payments disequilibrium—only this time the balance of payments crisis is taking place within a common currency. The frame of reference—sovereign debt crisis or balance of payments crisis—makes a significant difference not only for determining the causes of the euro crisis but also for the adequacy of policy measures to address the crisis. The sovereign debt crisis narrative has missed the interrelated nature of the macroeconomic imbalances within the eurozone. Despite the expectation of many observers at the time of the creation of the euro that the common currency would distribute the burden of adjustment more evenly across its member countries, the reverse is actually true. Compared to the European Monetary Union's predecessor regime, the European Monetary System (EMS), deficit countries are saddled with even higher adjustment costs in the common currency than before. In particular, they no longer have the tool of a nominal exchange rate change to address balance of payments disequilibria. This situation allows surplus countries—most importantly Germany—to exercise leverage over the key bargaining issues at stake in solving the eurozone crisis.

Acknowledgements

I would like to thank Vassilis K. Fouskas and the anonymous reviewers of the Journal of Balkan and Near Eastern Studies for their comments and suggestions. Earlier versions of this paper were presented at the Annual Convention of the International Studies Association 2014 in Toronto and the Brown Bag Lunch Talk Series at the University of Memphis, Department of Political Science. I would like to thank all the participants in these venues for their thoughtful questions and suggestions—especially Seniz Avcioglu, Jacqueline Best, Robert Blanton, Nicole Detraz, Katharina Rietig and Sharon Stanley. In the context of my research on this subject, I had very valuable conversations with European central bankers and policymakers. I would like to thank them for their time and their willingness to share their thoughts on the subject. Clint Thompson, Jennifer Marshall and Anna Talley provided outstanding research assistance on the paper.

Notes

^[1] Stephanie Blankenburg, Lawrence King, Sue Konzelmann and Frank Wilkinson, ‘Prospects for the eurozone’, Cambridge Journal of Economics, 37, 2013, pp. 463–477.

^[2] Ansgar Belke and Christian Dreger, ‘Current account imbalances in the euro area: does catching up explain the development?’, Review of International Economics, 21(1), 2013, pp. 6–17.

^[3] Stavros Tombazos, ‘Centrifugal tendencies in the euro area’, Journal of Contemporary European Studies, 19(1), 2011, pp. 33–46.

^[4] German growth rates were particularly weak at an annual average of 1.1 per cent between 1999 and 2005 (Annamaria Simonazzi, Andrea Ginzburg and Gianluigi Nocella, ‘Economic relations between Germany and southern Europe’, Cambridge Journal of Economics, 37, 2013, pp. 653–675, p. 658).

^[5] See Simonazzi et al., op cit. and Peter A. Hall, ‘The economics and politics of the euro crisis’, German Politics, 21(4), December 2012, pp. 355–371.

^[6] Costas Lapavitsas, Annina Kaltenbrunner, Duncan Lindo, J. Mitchell, Juan Pablo Painceira, Eugenia Pires, Jeff Powell, Alexis Stenfors and Nuno Teles, ‘Eurozone crisis: beggar thyself and thy neighbour’, Journal of Balkan and Near Eastern Studies, 12(4), December 2010, p. 335.

^[7] For an analysis of the mechanics of German leadership in the EMS, see Matthias Kaelberer, Money and Power in Europe: The Political Economy of European Monetary Cooperation, State University of New York Press, Albany, 2001.

^[8] Technically, the Maastricht Treaty included a no-bailout clause. However, governments eventually circumvented that by using the ‘emergency’ clauses of the treaty to provide the legal justification of the bailout.

^[9] Andrea Boltho and Wendy Carlin, ‘EMU's problems: asymmetric shocks or asymmetric behavior?’, Comparative Economic Studies, 55, 2013, pp. 387–403.

^[10] For a broader discussion of the recycling of surpluses in the international economy, see Janis Varoufakis, The Global Minotaur: America, Europe and the Future of the Global Economy, Zed Books, London, 2011; and Michael Pettis, The Great Rebalancing: Trade, Conflict, and the Perilous Road Ahead for the World Economy, Princeton University Press, Princeton, NJ, 2013.

^[11] The number of foreign migrants settling in Germany increased from 573,815 in 2008 to 965,908 in 2012. The number of Greek immigrants with at least one year of residence in Germany increased from 4110 in 2008 to 14,300 in 2011, while for Spaniards the number more than doubled from 3431 to 8266. Bundesamt für Migration und Flüchtlinge, Migrationsbericht 2012.

^[12] John Milios and Dimitris P. Sotiropoulos, ‘Crisis of Greece or crisis of the euro? A view from the European “periphery”’, Journal of Balkan and Near Eastern Studies, 12(3), September 2010, pp. 223–240, p. 225.

^[13] Ibid., p. 226.

^[14] According to Vassilis K. Fouskas and Constantine Dimoulas, ‘The Greek workshop of debt and the failure of the European project’, Journal of Balkan and Near Eastern Studies, 14(1), March 2012, pp. 1–31; and Vassilis K. Fouskas and Constantine Dimoulas, Greece, Financialization and the EU: The Political Economy of Debt and Destruction, Palgrave Macmillan, New York, 2013, this perspective leaves out the domestic origins of the Greek debt problem. Indeed, there are domestic causes for Greece's balance of payments position—as I will argue momentarily. However, the structural logic espoused by Milios and Sotiropoulos as well as the present paper uncovers a fundamental—if tautological—truth: someone's surplus has to be someone else's deficit. Germany's recipe for economic success cannot work in an interdependent economy.

^[15] On the contrast between coordinated and liberal market economies, see Peter A. Hall and David Soskice (eds), Varieties of Capitalism: The Institutional Foundations of Comparative Advantage, Oxford University Press, Oxford, 2001. For an application of the Varieties of Capitalism framework to the euro crisis, see Hall, op. cit.; and Mattias Vermeiren, ‘Monetary power and EMU: macroeconomic adjustment and autonomy in the Eurozone’, Review of International Studies, 39, 2013, pp. 729–761. For a related discussion of domestic Greek politics and for what he calls ‘disjointed corporatism’ in the Greek case, see Kevin Featherstone, ‘The Greek sovereign debt crisis and EMU: a failing state in a skewed regime’, Journal of Common Market Studies, 49(2), 2011, pp. 193–217.

^[16] See Klaus Armingeon and Lucio Baccaro, ‘Political economy of the sovereign debt crisis: the limits of internal devaluation’, Industrial Law Journal, 41(3), 2012, pp. 254–275.

^[17] Critics are quick to point out the undemocratic nature of the Troika-driven restructuring process. However, a devaluation of a reintroduced national currency equally poses risks for democracy. In addition, there is no guarantee that a national currency would restore real authority alongside the renewed sovereignty.

^[18] Lapavitsas et al., op. cit., pp. 327–328 and 368–371, distinguish between a ‘conservative exit’ and a ‘progressive exit’ from the eurozone. That distinction illustrates precisely the problem. At this point, a shift in social power toward labour in both the peripheral and the core countries represents more wishful thinking than a realistic alternative in European societies. Moreover, the benevolent cooperation required from core countries to restructure the peripheral countries' debt is anything but guaranteed after a eurozone break-up.

^[19] As Friedrich Nietzsche observed in the Genealogy of Morality, the German words for sin and for debt—Schuld and Schulden—share the same word origin and are related concepts. Friedrich Nietzsche, On the Genealogy of Morality, Cambridge University Press, Cambridge, 1887/2006. Thus, the close association between guilt and debt in German economic thinking is hardly surprising even from the linguistic perspective.

^[20] See, for example, Kenneth Dyson, ‘Norman's lament: the Greek and Euro area crisis in historical perspective’, New Political Economy, 15(4), December 2010, pp. 597–608.

^[21] There is also a significant geopolitical and security aspect to this issue; see Fouskas and Dimoulas, ‘The Greek workshop of debt’, op. cit. and Fouskas and Dimoulas, Greece, Financialization and the EU, op. cit.

^[22] See Jacques Mazier and Pascal Petit, ‘In search of sustainable paths for the eurozone in the troubled post-2008 world’, Cambridge Journal of Economics, 37, 2013, pp. 513–532 for an emphasis on this.

^[23] See on this point: Jörg Bibow, ‘The Euroland crisis and Germany's euro trilemma’, International Review of Applied Economics, 27(3), 2013, pp. 360–385.

^[24] Armingeon and Baccaro, op. cit.

^[25] As Varoufakis, op. cit. points out, during the years of large US surpluses after 1945, the USA recycled these funds into rebuilding war-torn Europe and Japan. Germany finds itself in a similar position these days vis-à-vis peripheral Europe.

^[26] See Simonazzi et al., op. cit. on this point.

^[27] For the significance of banking policies in the euro crisis, see Chiara Angeloni, Silvia Merler and Guntram B. Wolff, ‘Policy lessons from the eurozone crisis’, The International Spectator, 47(4), 2012, pp. 17–34.

^[28] For symbolic aspects of European monetary cooperation, see Matthias Kaelberer, ‘The euro and European identity: symbols, power and the politics of European monetary union’, Review of International Studies, 30, 2004, pp. 161–178.

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Matthias Kaelberer

Matthias Kaelberer is Professor of Political Science and Chair of the Political Science Department at the University of Memphis, Tennessee. He is the author of Money and Power in Europe: The Political Economy of European Monetary Cooperation (State University of New York Press, Albany, 2001) and numerous articles on European monetary cooperation.