Interdependence between Core and
Peripheries of the European Economy: Secular Stagnation and Growth in the Western Balkans. LEQS Discussion Paper No. 104/2016 February 2016
European countries are economically dependent upon each other. This paper therefore
embeds the analysis of the Western Balkan countries within a wider perspective of the
European economy as a whole. It combines a simple Core-Periphery model with an underconsumption
model to provide a convincing explanation of the emergence of secular
stagnation, the dependency relationships between the European economies, and the spillover
effects of Eurozone crisis to the Western Balkans. Due to tendencies to under-consumption,
the Core countries have been vulnerable to secular stagnation and in order to overcome this
tendency within the Eurozone they are dependent on export revenues from the peripheries to
sustain their economic growth. This has led to high trade and current account deficits during
the boom and placed the peripheries in a highly vulnerable position during the recession
period. Financialisation of the European economy has emerged as a response to the tendency
towards secular stagnation, as the provision of consumer credit has stimulated demand and
temporarily overcome under-consumption tendencies. The paper argues that continuing
austerity as a method to create internal devaluation is unlikely to succeed as a means to
extricate the periphery countries from the crisis. Given the dependencies of the European
economies upon one another, a possibly better way out of the current period of low growth
and stagnation would be a coordinated fiscal expansion to stimulate domestic and Europewide
demand
