Academic journal article Economics, Management and Financial Markets

Macroeconomic Policies in the Eurozone

Academic journal article Economics, Management and Financial Markets

Macroeconomic Policies in the Eurozone

Article excerpt


Considerable research attention has focused on the major design failures of the Eurozone, the interdependencies between bank and sovereign risk, and nominal divergences between the core and peripheral economies of the Eurozone. The theory that I shall seek to elaborate here puts considerable emphasis on the onset of the Eurozone peripheral crisis, the banking system of the Eurozone, and the quality of the throughput governance of the Eurozone.

JEL codes: E02, E44, Oil

Keywords: Eurozone, bank, sovereign risk, financial and fiscal policies

1. Introduction

In this paper I am particularly interested in exploring the burden of the adjustments to the imbalances in the Eurozone between the surplus and the deficit countries, the economic divergence among Eurozone member states, and the state of the EU in the context of the Eurozone crisis. This study is grounded in the considerable body of scholarship examining the media and political discourse about the tensions within the Eurozone, the divergent approaches towards strengthening the financial and fiscal policies of the Eurozone, and the private debt accumulation in the Eurozone. The mainstay of the paper is formed by an analysis of the asymmetric effects of the crisis on the Southern EU countries in relation to the Northern Eurozone member states, the deepening of Eurozone economic governance, and the weakness and instability of the Eurozone.

2. The Major Design Failures of the Eurozone

Allen and Ngai stress that the euro can be saved by allowing countries to default1 and in extreme circumstances to temporarily leave the Eurozone. The possibility of default and devaluation are much more effective short- term growth strategies. The stresses and strains of the crisis have revealed severe weaknesses in the design of the Eurozone. The Eurozone is in danger of a run on the debt or banks of one or more countries that could lead to pressures for a breakup. Attempts to cut government deficits through austerity plans slow growth further (more cuts are required). Given the variability of national budgets and the lack of formal budget limits on member states after the adoption of the single currency, regulations on public finances became indispensable to the functioning and stability of the euro.

The important point here is that the global financial crisis had serious repercussions in Eurozone economies. Allen and Ngai argue that the EU needs to assure investors of the benefits of a common currency. The sovereign debt crisis heightened after 2009 and bond yields rose to substantial levels for several countries that had poor finances. The euro is at risk of breakup on account of a run on the debts or banks of certain Eurozone countries. Since late 2009, the Eurozone was hit with sovereign debt crises, particularly in peripheral countries that had weaker public finances. Austerity measures and internal devaluations have serious consequences for economic growth and employment. Eurozone countries do not have the political solidarity for joint fiscal policy and to allow large transfers from wealthier economies to weaker economies.2

Leska holds that the economic and debt crisis threaten many Eurozone countries3 and the existence of the euro: some special mechanisms have had to be created (EFSF, ESM) and the introduction of special procedures in heavily indebted countries. Resolving the crisis requires further convergence of the Eurozone countries, the formation of a fiscal union and a banking union. The crisis has shown that the grand theories of European integration, neo-fimctionalism and liberal intergovernmental! sm could not provide answers to the questions raised by it.4

On Bagnai's reasoning, every Eurozone peripheral country was hit by the crisis in its own way. Insisting on the synchronic and diachronic differences of the Eurozone peripheral crises leads to biased outcomes. Profligate peripheral governments lacked the "discipline" and "credibility" of the euro. …

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