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A Europe of creditor and debtor states: explaining the north/south divide in the Eurozone

Abstract The divide in the Eurozone between a small set of core economies with strong international financial positions (North) and a set of debtor states that show periodic vulnerability in international financial markets (South) remains a core feature of the area. Our understanding of that schism, however, remains incomplete. Comparative political economists have emphasised differences in labour market institutions – in particular wage setting – to explain the split. This article takes issue with that view, suggesting that the case for a wage-driven explanation of creditor and debtor states’ positions in the Eurozone remains weak. Instead, it emphasises the role of capital flows and the uneven impact these had on domestic demand across Eurozone states both before and after 2008. This macro-economically centred explanation – in which financial, rather than labour market, dynamics play the central role – has important implications for our evaluation of Eurozone reforms.