By Justin Yifu Lin & Volker Treichel
Four years after the beginning of the global financial crisis, the protracted sovereign debt crisis in the eurozone is a looming threat to the recovery of the world economy and could lead to a renewed global financial crisis. While fiscal profligacy on the part of periphery countries has been viewed by many analysts as the root of the ongoing crisis, this paper argues that the impact on capital flows within the eurozone of financial deregulation and liberalization and of the adoption of the common currency was critical in exacerbating a growing competitiveness gap between core and periphery countries and explaining the evolution of the crisis.
