Insights In to the Euro Crisis and Financial Contagion


The European debt crisis that were only available in 2009 has had devastating effects and has strained relations throughout the Eu. These effects have had global ramifications.

And it isn’t over.

Recent work by Division of Politics & Economics Professors Graham Bird and Tom Willett on the crisis’ causes-as along with the flawed efforts to resolve this continuing problem-is receiving prominent attention in several leading journals centered on international policy, including World Economics and The World Economy, as well as The Encyclopedia of Financial Globalization.

\”The reasons for the current plague of currency and financial crises have strong roots in international finance and domestic and international political economy. Additionally they exhibit behavioral biases,\” explained Willett. \”These size of the crisis play to the strengths in our division.\”

Bird and Willett trace the causes of the euro crisis to the euro's creation, which they argue was politically motivated and ignored the warnings of mainstream economic theory. This, they claim, made an eventual crisis highly probable. It had been an emergency waiting to occur.

The severity of the crisis was increased, they suggest, by faulty institutional designs and by the development of perverse incentives facing the public sector (think Greece's fiscal crisis) and also the private sector (think housing bubbles, over-borrowing, and excessive bank lending).

Once the crisis erupted, it proved extremely difficult to solve.

\”While there's been a lot of research undertaken on monetary integration, there's been relatively little done on monetary disintegration,\” Bird said. \”Experience within the Eurozone has certainly shown that 'breaking up is hard to complete.' \”

In their newest work, Bird and Willett, together with doctoral student Wenti Du and visiting scholar Eric Pentecost, happen to be investigating the behavior of financial markets during the crisis, particularly the phenomenon of \”contagion.\” Their innovative research has led to a suite of papers in Open Economies Review, Applied Economics, and The World Economy.

This studies have examined the extent that \”contagion\” from one country to another was based on irrational market forces or reflected sensible responses to economic and political weaknesses which were revealed because the crisis progressed. They discover that both explanations have a contribution to make.

\”To explain what's happening,\” Willett said, \”it's essential to combine economic and political analysis using the kinds of decision-making biases you find in behavioral and neuroeconomics.\”

The research also challenges conventional wisdom this contagion became less pronounced as the crisis evolved.

An additional phase of the research has explored the effects from the crisis on Countries in europe away from euro area determined that the financial centers from the UK and Switzerland experienced a significant \”safe haven\” effect instead of contagion.

For Bird, their research \”has clear implications for policy-makers as they make an effort to lessen the vulnerability from the euro area to future crises. A better knowledge of contagion helps you to formulate policies that can mitigate the forces that can severely destabilize domestic and international markets.\”

Bird and Willett, along with their collaborators, are continuing research on this idea of contagion and also the channels through which it occurs.

\”Our research forms a fundamental part of the vibrant research agenda from the university’s Claremont Institute for Economic Policy Studies,\” said Willett, director of the institute.

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