Moreover, the grand bargain between the eurozone core, the ECB, and the periphery painful austerity and reforms in exchange for large scale financial support is now breaking down, as austerity fatigue in the eurozone periphery runs up against bailout fatigue in core countries like Germany and the Netherlands.

When the crisis struck, the economies of the eurozone periphery were buffeted by the twin shocks of spiking risk premiums and a collapsing housing market. At the same time, the German economy benefited from the return of capital fleeing the periphery.

That is where the eurozone is today. A debt crisis that erupted in Greece, the eurozone s outer periphery, has migrated with a vengeance towards the core, so much so that the survival of the eurozone itself is at stake.

The cause of the transatlantic growth gap thus should not be sought in excessive eurozone austerity or the excessive prudence of the European Central Bank. There are structural reasons for the eurozone economy s slow recovery from the financial meltdown in its periphery.

In 2010, attention was focused on responses to the crisis on the eurozone periphery Greece, Portugal, and Ireland. In 2011, the crisis moved to the core, with Italy and Spain feeling the heat, and concerns mounting about the viability of the eurozone itself.

The Germans have been insisting on institutional change more centralized eurozone control over periphery banks and government budgets in exchange for expanded access to financing for the periphery. Yet institutional change, despite the euphoria that greeted the latest EU summit, will take time, for it requires careful structuring and broader public support.

Another problem, at least from the point of view of the rest of the eurozone, is that inflation in Germany remains too low. With German prices rising at less than 1 annually, the eurozone periphery needs falling prices in order to regain the competitiveness lost during the pre 2008 boom years.

Moreover, unemployment in the eurozone has skyrocketed to an average rate of roughly 12 , with more than 50 youth unemployment in the periphery countries implying a long term loss of talent and erosion of the tax base. And, despite the spike in unemployment, productivity growth in the eurozone is decidedly negative.

The third stage of the eurozone crisis will arrive when the economic strength of the core is in doubt. Those very doubts undermine the credibility of the safety net that has been supporting the European periphery.

There is a center, led by Germany, and a periphery, consisting of the heavily indebted countries. The creditors imposition of strict austerity on the periphery is perpetuating the eurozone s division between center and periphery.

For starters, the eurozone crisis is worsening, as the euro remains too strong, front loaded fiscal austerity deepens recession in many member countries, and a credit crunch in the periphery and high oil prices undermine prospects of recovery. The eurozone banking system is becoming balkanized, as cross border and interbank credit lines are cut off, and capital flight could turn into a full run on periphery banks if, as is likely, Greece stages a disorderly euro exit in the next few months.

In the eurozone, shadow ratings already signaled red flags in the late 2000s in Greece and the other countries of the periphery. More recently, Ireland and Spain may deserve to be upgraded, following fiscal consolidation and reforms.

Moreover, Greece could exit the eurozone in 2013, before Spain and Italy are successfully ring fenced Spain like Greece is spiraling into depression, and may need a full scale bailout by the troika (the ECB, the European Commission, and the International Monetary Fund). Meanwhile, austerity fatigue in the eurozone periphery is increasingly clashing with bailout fatigue in the core.

D. Globalization threats and opportunities at the periphery

Sooner rather than later, other periphery countries will also need help. Greece, one hopes, will not be forced to leave the eurozone, though temporary options such as imposing capital controls may ultimately prove necessary to prevent a financial meltdown.

Greece now has a balanced current account quite an achievement after double digit deficits (as a percentage of GDP) a few years ago. But, in contrast to other economies on the eurozone periphery, this improvement was achieved entirely through import compression.

For now, the periphery countries calculate that the eventual benefits to be gained from remaining within the eurozone will outweigh the current pain of austerity. For its part, Germany exacts austerity as the price of its participation in the single currency.

Indeed, the market signal is clear At present, there is no shortage of funding available in most of the EU. The countries on the eurozone periphery, where credit might still be scarce, account for less than one quarter of Europe s economy.

The European Union s approach to bank regulation encouraged financial institutions to load up on government debt supposedly a risk free asset. Now, given the profound sovereign debt crisis in the eurozone periphery, government defaults threaten to take down the big banks.

To increase their chances of a bailout, banks in the eurozone periphery will doubtless borrow as much as they can from politically connected banks and investors in the core countries. Thus, national taxpayers will remain on the hook for bankers losses.

Spain, Italy, and the eurozone periphery face unprecedentedly high real borrowing costs, which are preventing a recovery in investment and hence economic growth. Without a return to growth, they cannot quell investors doubts about their fiscal sustainability and their banks solvency.

First, the eurozone authorities misread the real causes of the debt crisis, which stemmed mainly from a growing competitiveness gap between the core and periphery countries. The resulting private sector imbalances culminated in banking problems that were eventually transferred to sovereigns.

The fickleness of capital markets poses once again the paradox of thrift. As capital withdraws from emerging markets, these countries soon will be forced to adopt their own austerity measures and run current account surpluses, much like the eurozone periphery today.

Without external constraints, public and private expenditure grew precipitously in many countries on the eurozone periphery, while wages rose faster than productivity. As these countries posted current account deficits, northern European countries accumulated current account surpluses, exposing a widening competitiveness gap.

That also means that Germany and the ECB have less power than they seem to believe. Unless they abandon asymmetric adjustment (recessionary deflation), which concentrates all of the pain in the periphery, in favor of a more symmetrical approach (austerity and structural reforms on the periphery, combined with eurozone wide reflation), the monetary union's slow developing train wreck will accelerate as peripheral countries default and exit.

Even the ECB estimates that the eurozone unemployment rate will still be 9.9 in 2017 well above the 7.2 average prior to the global financial crisis seven years ago. And austerity and reform fatigue in the eurozone periphery has been matched by bailout fatigue in the core, boosting support for a range of anti euro parties in Germany, the Netherlands, and Finland.

As oil prices fall, households' real (inflation adjusted) income should rise, because they do not have to spend as much on fuel and heating. Lower oil prices make life easier, not harder, for highly indebted households in the US or the eurozone periphery.

Spain like Greece is spiraling into depression, and may need a full scale bailout by the troika (the ECB, the European Commission, and the International Monetary Fund). Meanwhile, austerity fatigue in the eurozone periphery is increasingly clashing with bailout fatigue in the core.

TOKYO Financial markets have greeted the election of Greece s new far left government in predictable fashion. But, though the Syriza party s victory sent Greek equities and bonds plummeting, there is little sign of contagion to other distressed countries on the eurozone periphery.

Eurozone wide inflation, at 0.8 , is below the target of close to 2 , and unemployment in most countries remains high. Under current conditions, it is hard for the periphery countries to reduce their costs to internationally competitive levels, as they need to do.

D. Globalization threats and opportunities at the periphery 32 34 17

A. quot Globalization quot at the periphery and concentration in centres

Nominal interest rates for periphery countries sovereign debt have remained extremely low, and, even when taking into account expectations of very low inflation (or even deflation), real interest rates are low. The eurozone now is facing not only a financial crisis, but a stagnation crisis.

But, in the end, ordinary Germans have been proved right, and the elites have been proved wrong. Indeed, if the eurozone is to survive, the northern countries will have to continue to help the periphery with new loans until access to private markets is restored.

The eurozone is now replicating how the global financial system dealt with such crises in 1982 and again in 1997. In both cases, the international authorities inflicted hardship on the periphery in order to protect the center now Germany is unknowingly playing the same role.

The Dutch economy s poor prospects are similarly alarming. The Netherlands is second only to Germany in the volume of credit that it channels through the so called Target 2 system to the eurozone periphery, and it is the periphery s largest creditor in per capita terms.

Within the eurozone, where until recently external accounts were nearly balanced, a similar creditor debtor spectrum has emerged, with Germany and the Netherlands at one end, and much of the eurozone south at the other. This partly explains both the hostile stance toward QE adopted in the German financial press and the over indebted periphery countries increasingly desperate calls for more action by the ECB.

Since the end of the credit boom in 2008, cross border claims of banks based in the eurozone core (essentially Germany and its smaller neighbors) toward the eurozone periphery have plummeted from about 1.6 trillion ( 2.2 trillion) to less than half that amount. (Part of the difference has ended up on the European Central Bank s (ECB) balance sheet, but this cannot be a permanent solution.)

Scotching the Eurozone

Demokratisasi di Eurozone

Optimizing the Eurozone

Poland s Eurozone Tests

Rebalancing the Eurozone

The solution is not over here. The solution is on the periphery.

The European Commission has given Spain, France, and the Netherlands more time to comply with the European Union s 3 of GDP deficit ceiling. Even German government officials now concede that something more than fiscal belt tightening is needed to revive the economies of the eurozone periphery.