Systemic Defects in the EMU and Small Countries in Central and Eastern Europe
Systemic Defects in the EMU and Small Countries in Central and Eastern Europe

Summary/Abstract: The euro, which was created in 1999, facilitated regional foreign trade in the euro, but combined with financial liberalization and global financialization it brought a massive cross-border capital flow and major banks’ operating without control, leading to real estate bubbles in the periphery in Southern Europe and New EU member states in the mid-2000s. When the Lehman shock occurred in September 2008 the capital inflow in these countries suddenly stopped and reversed. In order to rescue the banking sector which had a huge amount of non- performing loans governments’ were obliged to inject fresh capital into banks, resulting in an expansion of government debt. In order to decrease governments’ debt the Troika (European Commission, European Central Bank and the IMF) imposed austerity measures on the EU periphery countries as a prerequisite for financial support, but this policy in turn has caused economic stagnation in these countries. This paper considers the systemic defects in the EMU and policy problems in the Eurozone.

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