Whither macroeconomic stability in Europe?

2011 Intereconomics. Review of European Economic Policy  
Will the eurozone turn into a collection of emerging markets? "Emerging markets" suffer chronically from elevated macroeconomic instability. In the good years of expanding global liquidity they attract large capital infl ows at low real interest rates and enjoy a credit-funded boom. In the bad years, when creditors suddenly retract, they fi nd themselves deprived of fi scal and monetary policy options to smooth the decline in output and subject to high sovereign country risk premia, which choke
more » ... the economy. 1 These boom-bust cycles induced by international capital fl ows are the key reason why emerging markets have experienced periods of high growth over decades which then turned abruptly into crises followed by severe recessions. Only those economies which have suffi cient domestic savings, and thus do not depend on foreign capital, have escaped this roller-coaster ride. China is of course the biggest example of how a large pool of domestic savings can insulate a country from the vagaries of international capital markets.
doi:10.1007/s10272-011-0373-8 fatcat:uuefv4gd7jeenbv7xdcq64ah6i