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2013 Albert H. Gordon Lecture: The Political Economy of Banking Union and Finance in Europe
There is a broad consensus about the economic causes of the eurozone crisis, with some differences as to their relative importance. Excessive government deficits resulting in the accumulation of high public debt, a significant erosion of cost competitiveness and an associated widening of external deficits, weaknesses in national banking systems and housing price bubbles were the main culprits, although their relative significance different acros eurozone countries.
Underlying almost all of these economic causes of the crisis were political factors. First, in several countries imprudent fiscal policies and excessive government debt reflected shortsighted politics influenced by electoral cycles and the propensity to postpone the necessary adjustments until they became inevitable. Second, persistent and sizeable competitiveness losses were allowed and not corrected partly because of nonappreciation of their longer-term consequences for real incomes and employment in countries that were members of a monetary union and partly because of the inclination to avoid corrective policies and practices that would be politically unpopular in the short run. And, third, the risks of excessive bank credit expansion to the private sector and of progressively unsustainable houseing price increases were known but greatly underestimated by supervisory authorties and effectively ignored by government influenced by political considerations. All in all, public policy had been diverted from addressing key challenges in an environment of myopic euphoria that was also encouraged by the absense of market discipline. This last point is relevant to the present situation as market discipline has weakened again.