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The European Collapse of 2012/13

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  • Economics

Abstract

SP201 ISSN 1359-9151-201 The European Collapse of 2012/13 By C.A.E. Goodhart SPECIAL PAPER 201 LSE FINANCIAL MARKETS GROUP PAPER SERIES September 2011 Charles A. E. Goodhart is Director of the Regulation and Financial Stability Research Programme at the Financial Markets Group and Professor Emeritus of Banking and Finance at the London School of Economics. Any opinions expressed here are those of the author and not necessarily those of the FMG. The research findings reported in this paper are the result of the independent research of the author and do not necessarily reflect the views of the LSE. The European Collapse of 2012/13 By C.A.E. Goodhart (written in August 2010) A. Background Looking back now with the benefit of hindsight, the disastrous European collapse of 2012/13 appears from the vantage point of 2020 to have had a certain grim inevitability. Yet at the time, and in the years leading up to this debacle, it was far from clear what the future would hold, and many protagonists, especially in the policy-making arena, continued to contend that all would turn out alright, especially if their own policy proposals were followed. The collapse was mainly caused by two chief policy failures amongst European leaders. The first was to assume, myopically, that the unbalanced pattern of intra- European growth that had persisted from 1999 until 2008 could, and would, last indefinitely. The entry of the southern European, and peripheral, countries, such as Ireland into the eurozone (and prospective entry in Eastern Europe), had led to a housing and construction boom in those countries as nominal interest rates fell sharply, enthusiastically financed by banks (and their shadows) both within and outside their own country. The result in these countries was a massive increase in private sector indebtedness, lar

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