A Tale of Two Debt Crises: Southern and Eastern European Countries during the Great Recession

Internal devaluation and fiscal austerity has been one of the key prescriptions for how the Southern debtor states of the Eurozone should improve their economic position. Indeed, pro-cyclical fiscal austerity was regarded as a means to achieve internal devaluation because it puts downward pressure on domestic demand and wages. This prescription is based on a view of debt imbalances in the Eurozone that emphasizes wage developments. Yet there is a well developed alternative view that places primacy on the effects of capital flow. The Southern states of the Eurozone, however, are not the only states that have experienced problems in international debt markets. This has also happened to several former CEE countries now integrated in the EU. Though characterized by important differences in their economic histories, the states of the East and the South of the EU not only coexist, with one set (the South) in the Eurozone and the other (mostly) out. Both sets of countries are also indirectly linked (in addition to their direct links) through their different economic relationships to the Eurozone's core. And these indirect links are both financial and commercial. This paper compares the different ways in which financial flows and trade relationships came to play in how debt crises in the two sets of countries developed and were addressed. And it asks how the austerity and internal devaluation prescriptions to the South may be linked to the changing economic role of the Eastern members of the Union