Preparing for the Next Financial Crisis

International dimensions 61

European institutions, and amplied by the “doom loop” between sovereign and

banks’ balance sheets (Tirole, 2012; Fahri and Tirole, 2018, Chapter 9).

Peripheral countries (Ireland, Italy, Spain, Portugal, and Greece) experienced

large capital inows from other member countries during the run- up to, and cre-

ation of, the euro area. In a context of falling ination, low interest rates, disap-

pearing currency risk and low stock of capital per worker, core- country investors

expanded their cross- border supply of credit in these countries, including short-

term nancing, intermediated by banks, with negligible compensation for default

risk, letalone a possible exit from the euro area (Cecchetti and Schoenholtz, 201 ...