Volume 44, Number 175,
October-December 2013

European Sovereign Debt and Financialization, Alicia Girón and Marcia Solorza, Mexico, unam-iiec, 2013.

At a time when governments are seeking balanced budgets and strict inflation control, rather than promoting recovery, as a result of fiscal problems in the United States and the sovereign debt crisis in the Eurozone, this book is of great interest. It responds to the main questions of the controversial sovereign debt crisis in the Eurozone and the role of financialization and securitization.

The text is extremely well organized into chapters, while tables and figures integrated into the text illustrate the various proposals these two experts set forth.

Due to limited space, it would be impossible to describe each of the theses they develop, so this review will be limited to only the most relevant. The first chapter analyzes the transformation of the international monetary system from a heterodox theoretical perspective of money, as well as financial liberalization and deregulation, processes that have produced excessive credit expansion that drove the growth of the stock market and the participation of new financial actors. These authors aim to identify the causes of the global economic and financial crisis and its worsening in the financial circuits of the Eurozone, based on the financialization of European economies and the loss of monetary sovereignty.

The second chapter, which together with the third constitutes the backbone of this book, tracks the issue of sovereign debt in each of the so-called piigs: Portugal, Italy, Ireland, Greece and Spain.

The development of credit default swaps (cds) made it possible for investors to either speculate on or insure themselves against the possibility of a public debt default in some countries. The international financial crisis became a fiscal crisis in Europe. Both the global financial crisis as well as the sovereign debt crisis originated as a result of excessive debt. In the financial crisis, the insolvency of private debt was transferred to public balances. Later, the fiscal deficits and public debt increased in large part due to fiscal stimuli and the socialization of private losses through rescues. These and other stimuli prevented another Great Depression, but the accumulation of debt is now a serious problem.

The current sovereign debt crisis began to form starting when Greece (1981) and Portugal and Spain (1986) became members of what was then called the European Economic Community, especially since Greece joined the Eurozone in 2001. For years, the assumption was that an implicit guarantee protected the debt of Eurozone members. This idea led to an under-valuation of risk, which made the issuance of debt cheaper than it should have been. Although the Maastricht Treaty set strict limits on fiscal deficits and debt, in practice, compliance was not enforced. Even Germany and France have violated these limits.

In principle, long-term growth is what matters to ensure fiscal sustainability. However, following the global crisis, markets are more focused on short-term events and are therefore further damaging fiscal instability. Fiscal debt/gdp and debt/gdp relations are now the major factors determining the differentials between sovereign bonds.

One crucial aspect to which the authors call attention is the lack of common financial, fiscal and economic policy. As such, the economic and monetary union did not result in, as has been said, convergence, nor did it prevent macroeconomic instability. The large debts of the Eurozone are merely a symptom; the roots of the crisis go back to serious intra-regional differences in prices and salaries and the consequent accumulation of commercial imbalances among members. These imbalances arose as the nations could not use their own exchange rates; without currency flexibility, pressures trickle down to labor markets and unemployment.

The authors make it clear that without the mitigating effect of currency adjustments, monetary unions need fiscal transfers as another way to share risk. Another important question addressed in this work is the creation of Eurobonds: disagreements surrounding this topic have led to the failure of an agreement.

One of their most important arguments is that the center of power must play a greater role in national fiscal policies in order for the monetary union to work. Having a supranational power maintain fiscal policy and banking oversight at the national level led to excessive debt and granting of loans, both public and private.

The consequences of the European crisis have been disastrous. It is economically and politically impossible for the piigs to emerge from the crisis with the adjustments that have been imposed on them. As a result of austerity, these countries have devalued their standards of living, reducing salaries, pensions and social spending, which limits their growth capacity.

Chapter three is closely linked to the previous section, as it describes how on top of fiscal problems, the Eurozone also has issues in its banking sector. The link between banks and sovereign states is damaging to both. The banking failures in Europe arose as the crisis worsened and European financial circuits, closely integrated and linked to international financial circuits, became more and more uncertain.

The Euro is inclined to crisis in large part due to the fragility of Eurozone banks. The financial markets in Europe are so integrated that any insolvency threatens the stability of the entire system. The incapacity to coordinate fiscal policy when the banking system was extremely fragile and integrated was a major deficiency.

The authors emphasize that recently, the European crisis has led to a set-back for regional financial integration. The free circulation of capital is one of the fundamental principles of the monetary union, but in recent months, this free movement of capital has been limited, which aggravates the links between the banking and sovereign crises.

The final chapter returns to the debt problems of the 1980s experienced in many Latin American countries, aiming to extract some lessons for the piigs. The authors do make clear that there is a significant difference, however: Latin American countries each had their own currency and could implement their own devaluations, something that the piigs cannot do.

If the idea is to truly achieve more economic and monetary integration and make the Euro an irreversible project, there must be banking and fiscal unity and a common economic policy framework, which would imply the national states giving up a significant part of their powers. However, as the authors point out, more important than saving the Euro is protecting its citizens, especially those that are most vulnerable. They also warn that the end of the Eurozone crisis is still far off. Because it is an institutional, financial and fiscal crisis, its solution will be extremely difficult to achieve.

Alma Chapoy
Institute of Economic Research - unam

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Published in Mexico, 2012-2017 © D.R. Universidad Nacional Autónoma de México (UNAM).
PROBLEMAS DEL DESARROLLO. REVISTA LATINOAMERICANA DE ECONOMÍA, Volume 48, Number 191, October-December 2017 is a quarterly publication by the Universidad Nacional Autónoma de México, Ciudad Universitaria, Coyoacán, CP 04510, México, D.F. by Instituto de Investigaciones Económicas, Circuito Mario de la Cueva, Ciudad Universitaria, Coyoacán,
CP 04510, México, D.F. Tel (52 55) 56 23 01 05 and (52 55) 56 24 23 39, fax (52 55) 56 23 00 97, www.probdes.iiec.unam.mx, revprode@unam.mx. Journal Editor: Alicia Girón González. Reservation of rights to exclusive use of the title: 04-2012-070613560300-203, ISSN: pending. Person responsible for the latest update of this issue: Minerva García, Circuito Maestro Mario de la Cueva s/n, Ciudad Universitaria, Coyoacán, CP 04510, México D.F., latest update: Nov 13th, 2017.
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