Institutions in Crisis
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Institutions in Crisis

European Perspectives on the Recession

  • New Thinking in Political Economy series

Edited by David Howden

This critical and thought-provoking book explores the causes and consequences of Europe’s failed political and economic institutions. Europe’s recession has created new challenges as market turmoil has shaken the foundations of the twin pillars of the new drive for European integration – political and monetary unions. This book critically assesses the patchwork solutions continually offered to hold the troubled unions together. Failed political policies, from the prodigious ‘Common Agricultural Policy’ to ever more common fiscal stimulus packages, are shown to have bred less than stellar results in the past, and to have devastating implications for future European growth. The contributors outline the manner through which European monetary union has subsidized and continues to exacerbate the burgeoning debt crisis. Most strikingly, the interplay between Europe’s political and economic realms is exposed as the boondoggle it is, with increasingly bureaucratic institutions plaguing the continent and endangering future potential.
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Chapter 1: Institutional Illusion and Financial Entrepreneurship in the European Debt Scheme

Gabriel A. Giménez-Roche

Extract

1. Institutional illusion and financial entrepreneurship in the European debt scheme Gabriel A. Giménez-Roche While the ongoing public debt crisis reveals the very bad condition of the public finances of the European PIGS nations (Portugal, Ireland, Greece and Spain), the misbehavior of certain private financial institutions – such as Deutsche Bank and Goldman Sachs (Chambers and Ridley, 2010) – has come under increasing scrutiny by public officials. These accusations are of the same nature as those made in the past against the financial players who did not respect the flawed rules of the financial game played by governments, central banks and the banking system in general. In spite of any misbehavior by a financial institution, it should be remembered that financial markets are essentially markets where capital funds are transferred, usually via bank intermediation, from net-saving individuals to net-borrowing individuals. Capital losses should thus be limited to the funds of the individuals engaging in only this kind of exchanges. The same is valid for futures and derivatives markets. In futures markets, although there is a financial operation involved, it only consists of a sales and acquisition operation without any actual creation of wealth sprouting from it. Although one party to a financial contract can be a loser while the other is a winner, the economy as a whole should not be either gaining or losing. Yet financial markets move more funds in volume than the world’s total funds, a most disturbing fact if one remembers that financial markets are primordially derived...

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