Roberto J. Santillán-Salgado

(EGADE Business School, Mexico)

 

 

Abstract: Extreme volatility and high uncertainty characterized European financial markets between 2010-2012. In addition to the “financial contagion” effects of the 2007-2009 Subprime Mortgages crisis, the European financial markets’ turbulence was also related to a more fundamentally economic reality: structural heterogeneity among the Eurozone countries which was aggravated by the introduction of the euro in 1999. During the first decade of the Monetary Union there was a productive specialization among Eurozone countries that, contrary to the expectations of public policy designers, resulted in an increased differentiation of the member countries. That process resulted in a deepening gap; there are some countries that have been exceptionally good performers in several dimensions, and there are others that have lagged in most. More specifically, we aim to explain why several European countries were subject to a more adverse reaction from the financial markets than others, pushing them to the brink of illiquidity and making the default on their governments’ obligations a close possibility. To illustrate the increased heterogeneity observed among EU members since the introduction of the euro, we analyze a representative sample of eight countries: the four largest economies in the Eurozone, Germany, France, Italy and Spain; and four smaller economies, of which two are relatively successful exporters, Ireland and The Netherlands; and two more, Greece and Portugal, which have recently undergone serious fiscal and debt problems, so as to need a bailout from the EU, the ECB and the IMF, not to mention the case of Greece whose economy has deteriorated enormously under a populist government and has fallen in arrears on its international compromises. 

 

 

Key words: structural heterogeneity; Eurozone countries; financial turbulence 

 

JEL codes: F41, F43, O5