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The Trilemma and the Eurozone: A Pre-Announced Tragedy of the Greek Debt Crisis

Pages
24
2015 / No. 1
Digital Edition

The Trilemma and the Eurozone:
A Pre-announced Tragedy of the Greek Debt Crisis


Eleftherios Thalassinos
Professor, University of Piraeus, European Chair Jean Monnet

 

The main aim of this paper is to examine if the sovereign debt crisis in the Eurozone especially in the South West Euro Area Periphery-5 countries (SWEAP-5) could have been forecasted and prevented. Our approach is to examine if the historically confirmed monetary policy Mundell's Trilemma is consistent with international and regional financial architecture, so that it could be used to get an unbiased forecast of the upcoming sovereign debt crisis in Eurozone. Our findings are based on three limitations: Firstly on inadequate policy response to persistent disequilibria because it ignores early warning signals, secondly on the small open economy hypothesis with "infant industry" throughout the sample period and thirdly on the absence of any automatic mechanism of surplus recycling, either on the international (Global Minotaur) or regional (Eurozone) level. These limitations have destroyed the productive capacity of less developed economies, like SWEAP-5, and can be considered as the obstacles for their unification in the European Economic and Monetary Union (EMU), which apparently has never been an Optimum Currency Area (OCA) as the relevant economic theory defines.