Gregory Fuller

Who’s Borrowing? Credit Encouragement vs. Credit Mitigation in National Financial Systems:

Households and banks have increasingly displaced non-financial businesses and governments as the primary debtors in modern capitalist economies, resulting in more severe economic cycles, increased inequality, and external macroeconomic imbalances. Yet while the trend is nearly universal among developed economies, its intensity varies a great deal from country to country. This article highlights (1) the common international causes behind the global expansion of household and financial sector debt; (2) the divergent national approaches to household credit that cause household and financial sector indebtedness to vary from country to country; and (3) the likely causes of these disparate approaches. National approaches to interest rate restrictions, property transfer taxation, high loan-to-value (LTV) mortgages, mortgage interest taxation, and secondary markets for consumer debt can either encourage or mitigate household and financial sector borrowing. Whether a country encourages or mitigates such credit is determined by an idiosyncratic mix of institutional, political, and ideational factors. Especially important are the size of domestic pension funds, banks’ preferred business models, the political power of financial firms, and whether policymakers are more sensitive to the gains promised by a credit-fueled expansion or to the risks posed by an overleveraged collapse.

Exporting Assets: EMU and the Financial Drivers of European Macroeconomic Imbalances

ABSTRACT European Economic and Monetary Union has fostered an unstable complementarity in European financial markets between the growth models favoured by European savers (in the northern ‘core’ of Germany and other exporting states) and its borrowers (in the debt-fuelled and demand-driven eurozone periphery, including countries like Greece and Ireland). In the 2000s, the result of this development was a sharp decrease in real interest rates across the eurozone periphery, leading to rapid but inflationary growth. This eroded the competitiveness of exporters in the European periphery, making them more reliant on capital inflows to pay for growing current account deficits. Those deficits became problematic after the disruption of eurozone financial markets beginning in 2008. The policy response to the crises has focused on reducing the competitiveness gap between the core and periphery – while overlooking the financial forces that contributed to those competitiveness differentials in the first place. Indeed, it is the fragile and perverse complementarity in eurozone financial markets – more than any external shock or competitiveness differences – that lies at the root of Europe’s ongoing crisis.