The Political Economy of the Euro Debt Crisis: A Comparison with Standard Balance of Payment Crises

This paper compares the special type of balance of payment crisis the euro zone was caught into with standard balance of payment crises. The Euro's "silent" balance of payment crisis was different from previous crises in a number of respects that pertain firstly to the economics of the crisis. But it also differs in political-economy terms from previous crises in two important respects. First, it was not anticipated. Second, given the degree of capital mobility and the potential for contagion, the costs of default were unpredictable and potentially large. Ultimately, financial assistance was there not only to prevent individual countries' default but functioned as an insurance against the collective risk of a failure of the EMU project. This explains why the provision of financial assistance was initially suboptimal, generally conflictual and mostly organized along intergovernmental lines.