After the Eurozone Crisis: Causes, Consequences, and Lessons for European and US Policymakers
Key Points
- European economies with flexible exchange rates coped far better with the challenges of the Great Recession than those inside the eurozone or with currencies pegged to the euro.
- The deflationary pressures also contributed to the rise of authoritarian populist politics in Europe. Notwithstanding positive growth rates expected in 2017 and 2018, the eurozone is threatened by one-size-fits-all monetary policy, guided by an extreme aversion to inflation.
- Eurozone also suffers from inadequate fiscal governance. In its reform, Europeans should follow the experience of US federalism, combining a one-off federalization of some eurozone debt with a credible no-bailout policy going forward.
Executive Summary
With positive growth rates projected for 2017 and 2018, the eurozone’s economic crisis appears to be over, at least for now. However, the damage lingers, and so do the factors that contributed to its severity across a number of the eurozone’s economies.
The most important among those is a one-size-fits-all monetary policy, guided by an extreme aversion to inflation. A comparative record of growth and fiscal consolidations in Europe illustrates that economies with flexible exchange rates coped far better with the challenges of the Great Recession than those inside the eurozone or with currencies pegged to the euro. Ultimately, the recovery in the eurozone was associated with a monetary easing in the form of a substantial program of asset purchases undertaken by the European Central Bank (ECB) in the later stages of the crisis.
The deflationary pressures attributable to the ECB’s behavior in the early years of the Great Recession likely contributed to the rise of authoritarian populist politics in Europe. While the populist wave is receding, its impact on European politics has been all too real—including the heightened risk of unravelling the EU and paralyzing Europe in the face of the increasingly aggressive Russia.
Going forward, a different monetary regime that acknowledges the importance of a stable growth in nominal spending—possibly with an explicit target level for nominal spending—is necessary for the ECB to mitigate damage from future economic shocks.
Besides monetary policy, inadequate fiscal governance continues to plague the eurozone. Current European discussions seem to be headed toward open-ended pooling of national-level debt. Instead, they ought to follow the experience of US federalism and its emphasis on a clear distinction between the fiscal authority of states and the fiscal authority of the federal government. That would involve a one-off federalization of some or all eurozone debt and giving new fiscal authority to EU institutions, while strengthening the fiscal autonomy of member states, including a no-bailout policy for future defaults by member states.
Πηγή: American Enterprise Institute
