ATHENS – The eurozone’s sovereign-debt crisis represents a significant challenge for Europe and the global economy. But it is also an opportunity: overcoming the challenge will not only contribute to a sustained global economic recovery, but will also test our capabilities to control the dangers of globalization.
The integration of markets in recent decades, coupled with enormous technological progress in communications and transport, has diffused growth to regions that for centuries lagged behind the dramatic rise in living standards witnessed in Europe, North America, and Japan since the Industrial Revolution. More efficient use of global resources allowed productivity to grow, lifting billions of people out of poverty and into the modern world.
The downside is that national control over economic policy has been significantly diminished, while international economic governance confronts new problems. As markets integrate and systems converge, addressing imbalances in either the real economy or the financial sector becomes increasingly difficult, owing to the constraints on multilateral policy cooperation built into institutional arrangements designed for nationally-bounded economies.
Over the last decade, large external imbalances were allowed to emerge within the eurozone. The competitive position of peripheral member countries – particularly Greece, Spain, Portugal, Ireland, and Italy – deteriorated sharply vis-à-vis the core countries. Governments in the periphery turned a blind eye to credit-fueled bubbles and public or private debt, and failed to adopt counter-cyclical fiscal measures or promote structural reforms to improve competitiveness. Large external deficits were matched by surpluses in core countries, whose excess savings then flowed back to the periphery, in turn permitting excessive borrowing and leading to fiscal blowouts.