Financial shocks coming from weak euro zone countries are three times more likely to destabilise the region’s economies than shocks from richer countries, according to new research.
Dr Nikolaos Antonakakis, an applied economist at the University of Portsmouth's Business School, claims the results challenge arguments for a single European currency and suggest a need to re-examine the single currency in the new post-economic crisis era.
He said: “The findings highlight the increased vulnerability of the eurozone from the destabilising shocks originating from beleaguered countries in the periphery.
“This is the first study to have found evidence of a financial contagion effect where what happens in weaker eurozone countries spills over to the rest of the region.
“Most people assume the effect is the other way around. “It is counter-intuitive and suggests there is probably a need to reassess the effectiveness of the EU directorate economic policies.”
Dr Antonakakis studied the difference between the 10-year government bond yields of nine euro zone countries — Austria, Belgium, France, Netherlands, Greece, Ireland, Italy, Portugal and Spain — between March 2007 and June 2012.
The data from the nine states was compared with German government bond yields of the same maturity during the same period and all data was collected from Bloomberg.
The results provide information on whether each country is a receiver or a transmitter of economic shocks.
Dr Antonakakis said: “These results are of great importance because, for instance, changes in government bond yield spreads in other eurozone countries can be a good indicator of future changes and their repercussions.
“Shocks coming from the periphery have, on average, three times the destabilising force on other countries than shocks coming from the core, richer nations.
“This indicates a decoupling effect of countries on the periphery and those at the core that may challenge the argument for a single currency in the countries examined.”
He claimed that the results shed new light on the interdependencies and complex links between euro zone economies during the debt crisis and global economic downturn.
He said: “The results have important policy implications and can be used to change for the better how governments and regions manage the balance of austerity measures and growth-promoting initiatives.
“The cost of severe austerity measures is not just economic, it has human lives at its heart. “If we can produce models which can be used to predict the effect of different scenarios they could be used to help stave off some of the more barbaric measures used to contain economic problems.”
