International Network for Economic Research Working Paper 2012 . 1 Has the Financial Crisis Changed the Business Cycle Characteristics of the GIPSI Countries ? by Andrew Hughes Hallett

Since the financial crisis erupted in 2008, the governments of Portugal, Ireland, Italy Greece and Spain (GIPSI) find themselves in a position where financing their debts has become increasingly difficult. As a result, these governments reduced government expenditure and/or increased taxes in order to reduce their deficits. Hence, whilst other countries in the Eurozone – notably Germany enjoy a recovery from the financial crisis, the GIPSI countries remain in recession. It is therefore no surprise that the business cycles of the northern and southern European countries have increasingly diverged. This in itself poses already a risk for the Eurozone, as it makes the common monetary policy less effective. In this paper we analyse these business cycles in detail. We ask whether the financial crisis has changed the characteristics of the business cycles of the GIPSI countries. For example, the austerity measures in Greece may lead to a convergence of government spending between Germany and Greece and to greater convergence of business cycles in both countries. If this is the case, then at least there is some hope that the common monetary policy will be more effective in the future. But the austerity measures could also lead to greater divergence between Greece and Germany, in which case leaving the monetary Union would not only be beneficial for Greece. It might be unavoidable.