I (Could Have) Told You! Early warning indicators and crisis performance of the 12 “old” Euro-countries under the economic crisis 2008–09 |
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Affiliation: | 1. Etla Economic Research, Finland;2. Ministry of Economic Affairs and Employment, Finland;3. University of Helsinki, Finland;1. Department of Humanities and Social Sciences, Indian Institute of Technology Dharwad, Karnataka, 580011, India;2. Department of Economic Sciences, Indian Institute of Technology Kanpur, Uttar Pradesh, 208016, India;1. Johannes Gutenberg University Mainz, Germany;2. German Development Institute, Germany |
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Abstract: | The impact of the economic crisis 2008-09 was remarkably different in the 12 “old” member states in the Euro-zone. Five of them were hit especially badly; four of them even had to be bailed out by the rest in one way or another. This paper asks if one could have foretold, based solely on information available prior to 1999, which of the countries then about to enter the Euro-zone would run into economic trouble once a serious economic crisis occurred. The focus is on the (post)predictive power of three kinds of leading indicators: economic indicators, political indicators (indicating quality of governance), and indicators derived from the theory of optimal currency areas (OCA). Since there are more indicators than cases, PLS-regression is used to gauge the (post)predictive strength of the indicators examined. The results show that political indicators have quite some (post)predictive power in this case, whereas indicators derived from OCA-theory do not do too well. Economic indicators perform better than indicators derived from OCA-theory, but generally less well than the political indicators. Thus, the experience from the latest economic crisis in the Euro-zone suggests that more emphasis should be placed on the quality of governance record of a country when deciding if it should be deemed fit to become a member. |
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Keywords: | Financial crisis Euro-zone Early warning indicators Partial least squares C38 E65 F15 H12 |
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