Financial liberalization and the onset of financial crisis in Western European states between 1983 and 2011: An econometric investigation

• Models the effect of financial openness in European states between 1984 and 2011.
• Tests the relation between the onset of financial crisis and financial openness.
• Finds a positive correlation between the two.
• Indicates importance of reviewing financial architecture of European policy-making.

This paper argues that financial liberalization played a significant role in destabilizing Western European economies since the financial crisis of 2008. This process owes much to changes in the financial governance of Western Europe in the late 20th century. This contrasts with the conventional story that the Eurocrisis is primarily due to peripheral countries’ excessive government spending or the German government's neo-mercantilist policies. The paper shows a robust and statistically significant positive correlation between gross locational capital flows over GDP and the onset of financial crisis, using linear probability models and logit regressions, providing evidence for the hypotheses.