Table 1
Source publication
Capital account convertibility in combination with fixed exchange rates historically promotes
a type of financial integration leading to sudden-stop crisis on the periphery, thus making a it
hard to pursue successful catch-up strategies. Indeed the successful catch-up of Western
Europe to the USA after 1945 was based on the rejection of capital acc...
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... Secondly, like many episodes that accompanied the expansion of the Gold Standard in the pre-1914 system (Notermans 2012A), elimination of exchange rate risk and the extension of a common regulatory framework to the periphery proved to be an engine for excessive private and public indebtedness. This tendency towards boom and bust cycles on the periphery was further exacerbated by the reigning monetary regime in two ways. ...
Although the World Bank has labelled the EU a “convergence machine”, the process has stalled. Being heavily dependent on foreign capital inflows, the drying-up of international financial markets in 2008 led to a severe crisis in the East European member states, undoing much of the gains since the start of transition. The Eurocrisis, that erupted in 2010, and partly was caused by the 2008 financial meltdown, sparked a similarly severe crises in Southern member states as a result of which the EU’s north-south gap in per capita GDP is increasing again. This performance contrast sharply contrasts with the experience of countries such as Japan, South Korea, Taiwan, Singapore and Hong-Kong.
This paper argues that the differences in convergence performance can only be understood in terms of the interaction of macroeconomic, microeconomic and political factors. In particular it makes three points (1) The persistently high GDP growth rates required for successful catch-up invariably reflect high rates of investment. Through the credit channel, the switch to monetary disinflation and inflation targeting regimes ushered in a period of permanently lower growth. (2) Substantial inflows of foreign capital historically have proven to be a two-edged sword as they expose the debtor country to destabilising sudden stops, such as witnessed again since 2008. (3) On the microeconomic level, successful catch-up has relied on asymmetric integration into the world economy allowing emerging economies to enjoy the benefits of a liberal global order while not exposing their domestic economies to the full pressures of that system.
Accordingly, the path along which European integration integrated peripheral regions into the international economy is the principal cause of the failure to achieve rapid convergence. The EU’s insistence on a level playing field increasingly interferes with peripheral countries' need for asymmetric integration, whereas the single market in financial services in combination with the adoption of the common currency exposed the periphery to highly damaging shocks. The switch to monetary targeting and the common currency, in turn, has directly hindered convergence by depressing overall EU growth rates, and indirectly by promoting political pressures in the core countries to insist on a reciprocal mode of enlargement.
... The costs would multiply if default and devaluation were eschewed in such a credit crisis in favour of austerity and defence of the gold parity (McLean 2006). Indeed, many analysts of the pre 19-14 Gold Standard concluded that it served to destabilise peripheral members (Galarotti 1995:37-41;Notermans 2012). Finally, adherence to the Gold Standard in times of relative gold scarcity would inhibit the ability of monetary policy to promote an ample supply of domestic investment funds necessary for sustained growth. ...
... All this changed since 2008, when the financial systems of the metropolitan countries came under stress, thus confronting the periphery with a sudden dryingup of capital inflows, not unlike the "sudden stop" crises that destabilised peripheral countries during the classical Gold Standard (Notermans 2012). Countries like the Czech and Slovak republics and Hungary, where a substantial share of foreign direct investment (FDI) had been employed in manufacturing enjoyed some protection from sudden stops, whereas in the Baltics, Spain and Ireland, where capital inflows fuelled real estate booms, the collapse in GDP after 2008 was on a scale not seen since the Great Depression. ...
