Chapter 3The Single Currency Area in the Context of International Crisis

This chapter will follow closely the storyline of the international financial crisis of 2007–2008 and will draw its impact on the already dysfunctional working mechanisms of the Eurozone. After a quick recap on what was happening in Europe before the crisis in terms of growth and GDP (§ 3.1), with a special focus on real estate speculative bubbles, we will explain in plain words the effects of the crisis. § 3.2 illustrates in depth the astounding phenomenon of the dissolution of the single rate curve, shifting the reader's attention at first onto the dynamics of the real interest rate and then onto the contradictory behaviour of the Eurozone's credit spreads. An intuitive explanation of this phenomenon will be given in terms of “shadow currencies” hidden inside the Eurozone monetary system.

3.1 Before the Crisis: the Adverse Effects of the Single Currency

It is commonly accepted that until the explosion of the international financial crisis in 2007, the European financial system has been running smoothly, guaranteeing price stability and good performance of the growth for most Eurozone countries.

At a first glance, these assumptions seem to be firmly supported by the data: the inflation in the Eurozone averaged at around 2%, which is the standard objective of the ECB, and GDP growth rates were sustained, especially for the peripheral countries. Figures 3.1 and 3.2 give us the details of what we are stating. ...

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