The fallout from the Eurozone crisis continues to have an impact on European economies, over six years after the crisis first peaked in 2010. Drawing on insights from recent research, Mark Copelovitch, Jeffry Frieden and Stefanie Walter discuss four lessons from the crisis. They state that the crisis has been largely predictable, that monetary union has raised the political stakes in crisis management, that the institutional problems that have plagued European Monetary Union from the start persist, and finally, that unless there are significant reforms, the future of the euro remains uncertain

Copelovitch, Mark

Frieden, Jeffry

Walter, Stefanie

LSE Research Online

07/10/2016Four lessons from the Eurozone crisis – and why the future ofthe euro remains uncertainblogs.lse.ac.uk/europpblog/2016/10/07/four-lessons-from-the-eurozone-crisis/The fallout from the Eurozone crisis continues to have an impact on European economies, over sixyears after the crisis first peaked in 2010. Drawing on insights from recent research, MarkCopelovitch, Jeffry Frieden and Stefanie Walter discuss four lessons from the crisis. They statethat the crisis has been largely predictable, that monetary union has raised the political stakes incrisis management, that the institutional problems that have plagued European Monetary Unionfrom the start persist, and finally, that unless there are significant reforms, the future of the euroremains uncertain.The Euro crisis, which first peaked in 2010 and continues to haunt the Eurozone today, has been the most seriouseconomic crisis in the history of the European Union. In fact, taken together, the global financial crisis and theEurozone crisis have by now caused more lasting economic damage in parts of Europe than the Great Depressionof the 1930s. The economic crisis has also turned into a serious political crisis, as conflict among and within EUmember states about how to resolve the crisis threatens both European integration and domestic stability.1/4In 2014, we convened a transatlantic group of leading scholars of international and comparative political economy tocollaborate and present research on the political economy of the crisis. Our goal was to develop a set of analysesthat shed light on the politics of this crisis – grounded in the robust existing literature on the political economy ofinternational money and finance – and which would be useful for scholars of comparative politics, Europeanintegration, and international political economy. A collection of papers from this project has just been published as aspecial issue of Comparative Political Studies and insights from several of these papers will be discussed in thisblog, including our own introductory article. In this blog post, we focus generally on four key lessons of the Eurocrisis emphasised in our collaborative research.Lesson 1: The economics and politics of the Euro Crisis have been largely predictableThe Euro crisis is, in large part, a variant of the balance-of-payments crises that many countries have experiencedover the past two centuries. The typical trajectory is broadly similar across space and time: a country’s citizensborrow heavily from abroad and use the borrowed funds for current consumption rather than investment; the ensuingeconomic expansion becomes a boom, then a bubble, until finally the bubble bursts. This is what happened inEurope, with some unusual features. But the theoretical and empirical insights of decades of political economyanalyses of balance-of-payments crises illuminate what is happening in the Eurozone, and why.To be sure, the Euro crisis also has some unusual features related to the architecture of the single currency. Theseunique features of monetary union contributed to the most important causes of the crisis: a single monetary policyfor countries with widely divergent macroeconomic conditions; the absence of fiscal policy coordination among Euromember states; fragmented financial regulation; and the lack of a credible no-bailout commitment. Ultimately, thesefactors worked together to bring the Eurozone close to collapse.Nonetheless, despite these unique aspects of EMU, the sequence of events in the Euro crisis has closely mirroredthat of previous crises in Latin America, East Asia, and elsewhere. Within the Eurozone, massive capital flows fromthe North to the periphery led to a boom, and then a bubble, in the periphery. As the 2007-9 global financial crisisaccelerated, this bubble burst, triggering the Euro crisis and leaving peripheral countries with debts they could notservice to Northern European creditors.Just as the causes and chronology of the Euro crisis have closely resembled past financial crises, so, too, have thepolitics. As in previous crises, we have seen bitter domestic and international conflicts over the distribution of theburden of adjustment in the Eurozone. At the domestic level, the Euro crisis has mobilised public opinion, fueledpolitical tensions about labour market and regulatory reforms, and increased support for right-wing extremist parties.At the international level, the crisis has triggered highly acrimonious debates over IMF/EU bailouts, banking union,immigration, and the distribution of adjustment between debtor and creditor countries. The core of the CPS specialissue is a set of papers analysing these domestic and international debates in depth and bringing the tools andexisting literature of comparative and international political economy to bear to explain the political and policyoutcomes that we have seen in the Eurozone since 2010.Lesson 2: Monetary union has amplified the political stakesDespite the broad similarities between the Euro crisis and past financial crises elsewhere in the world, it is also clearthat the political stakes have been amplified because the crisis has occurred within the broader context of monetaryunion and European integration.Indeed, the crisis response, both within debtor countries like Greece and Portugal and at the European level, hasbecome deeply intertwined with debates about the future of economic and political integration in the EuropeanUnion, the possible collapse of the single currency, and the “Grexit” and “Brexit” debates. In addition, it has alsobecome clear that European institutions – most notably, the European Central Bank and European Council – haveentrenched and amplified the power and influence of creditor countries such as Germany even more than is the2/4case in the IMF and other institutions of global financial governance.Lesson 3: The underlying problems of EMU never went awayA third key lesson is that the underlying economic problems of monetary union and the key political debates aboutthe structure of Eurozone governance have persisted since the 1990s. In fact, these problems were largelypredictable and broadly foreseen by several scholars and observers prior to 1999. In the years between the signingof the Maastricht Treaty and the launch of the Euro, it became very clear that, while policymakers were unified intheir goal of creating a stable Euro and Eurozone, domestic politics within EMU member-states were such that nocountry was able to agree to the sorts of policies and institutions that would have enabled the Eurozone to avoid theproblems that have plagued it since 2010.In this sense, there is a plus ça change quality about the political and economic debates within the Eurozone today.Faced with the same set of persistent macroeconomic imbalances and similar implacable domestic political barriersto further integration, European policymakers and national-level politicians in EMU member-states have pursuedpiecemeal, least common denominator responses, which have prevented full collapse of the Eurozone but donelittle to resolve the core issues and imbalances at the heart of the crisis.Increasingly, then, the appropriate analogy for the Eurozone is not the Great Depression, but rather Japan, whichhas been mired in an era of stagnation since the 1990s, and whose persistent problems (debt-laden banks,unfavourable demographics, persistent deflationary pressures) appear disturbingly similar to those of the Eurozonetoday. Faced with the possibility of long-term “secular stagnation”, Europe’s debt problems look even more seriousand threatening to the long-term success of EMU. Unless economic growth returns to the Euro area, Greece andother member-states face the possibility of decades of grinding deflation, long-term unemployment, and stagnation.The future threatens to bring not just lost decades, but also lost generations.This scenario does not bode well for the future of European monetary integration, particularly as economicstagnation and the ongoing refugee crisis amplify political support for anti-Euro and anti-EU parties in both creditorand debtor countries. Indeed, as Jones, Kelemen, and Meunier conclude in the concluding paper of the CPS specialissue, while “failing forward” through incomplete, but politically expedient, policy responses that mitigate but do notresolve the Eurozone crisis may have worked thus far, this is not a recipe for the long-term success andsustainability of either the Eurozone or the broader European Union.Lesson 4: Monetary union without fiscal and regulatory coordination is untenableThe final key lesson, in light of the previous two, is that ensuring the long-term viability of the Euro will requireEuropean policymakers to adopt some combination of the policies and institutions – a true Eurozone lender of lastresort, some form of fiscal policy coordination, increased labour mobility between member states – necessary tomaintain a monetary union among disparate national economies with large and persistent macroeconomicimbalances. Whether achieving these objectives requires a formal fiscal and political union is not clear. What isclear is that the status quo cannot persist indefinitely if the Euro is to survive in the long term.In this sense, the current political and economic debates in Europe closely mirror those of the United States fromthe 1790s through the 1860s. From the debates between Alexander Hamilton and Thomas Jefferson over federalassumption of state debts, to the clashes over the First and Second National Banks of the United States, to theultimate completion of American monetary union in the 1870s, the United States’ experience demonstrates thatcrafting a functioning economic and monetary union is a long hard road and requires politically and economicallydifficult compromises between different regions and societal groups.Whether or not European policymakers are able to overcome the domestic and international obstacles to suchcooperation is, as always, a political rather than an economic question. Indeed, it is important to note that there areno technical obstacles to the adoption of any of the policy or institutional solutions to resolving the Euro crisis and3/4addressing the imbalances within the monetary union. The ultimate problem is that adoption of any of them remains,now and for the foreseeable future, politically infeasible.The concluding chapter of European monetary integration is yet to be written. Its contents, along with the long-termprospects of the Eurozone, remain uncertain.Please read our comments policy before commenting .Note: This article gives the views of the authors, and not the position of EUROPP – European Politics and Policy, norof the London School of Economics. Featured: the European Central Bank in Frankfurt. Credits: Maslmaslmasl (CCBY-SA 4.0)Shortened URL for this post: http://bit.ly/2dVrTK3 _________________________________About the authorsMark Copelovitch – University of WisconsinMark Copelovitch is Associate Professor of Political Science and Public Affairs at the University ofWisconsin – Madison and the author of “The International Monetary Fund in the Global Economy”(Cambridge). Jeffry Frieden – Harvard UniversityJeffry Frieden is Professor of Government at Harvard University, and the author of “ CurrencyPolitics (Princeton), Lost Decades (Norton), and Global Capitalism” (Norton). Stefanie Walter – University of ZurichStefanie Walter is full Professor for International Relations and Political Economy in the Departmentof Political Science at the University of Zurich, and the author of “Financial Crises and the Politics ofMacroeconomic Adjustments” (Cambridge).4/4

Four lessons from the Eurozone crisis – and why the future of the euro remains uncertain

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