Bilateral macroeconomic connectivity and crisis patterns

This paper estimates the degree of connectivity between the 27 countries of the European Union. Within it the 17 countries of the Eurozone are believed to have stronger sector- level connectivity than other countries. We focus on the connection between those relationships and crisis indicators. The main findings are: (i) Economic fluctuations, fiscal deficit conditions, and degree of economic interaction were all found to have a powerful effect on connectivity between Eurozone nations, especially in the areas of trade and banking. (ii) The Currency Crisis Indicator for countries that have adopted the euro was also observed to increase continuously after Eurozone membership. (iii) Economic coordination was observed to have a more negative effect on currency crisis risk for Eurozone countries than relative fiscal vulnerability. However, fiscal vulnerability accounted for a larger portion of the impact of trade connectivity on crisis is stronger than did cyclical coordination.