The Fundamental Design Flaw of the Eurozone

From the very start, the European Monetary Union (EMU) was set up to fail.


The host of problems we are now witnessing, from the solvency crises on the periphery to the bank runs in Spain, Greece, and Italy, were built into the very structure of the EMU and its banking system. Policymakers have admittedly responded to these various emergencies with an uninspiring mix of delaying tactics and self-destructive policy blunders, but the most fundamental mistake of all occurred well before the buildup to the current crisis. What we are witnessing today are the results of a design flaw. When individual nations like Greece or Italy joined the EMU, they essentially adopted a foreign currency—the euro—but retained responsibility for their nation’s fiscal policy. This attempted separation of fiscal policy from a sovereign currency is the fatal defect that is tearing the Eurozone apart.

As a lecturer in economic policy at the Mediterranean University of Reggio Calabria, Reggio Calabria, Italy, Alberto Botta comes from a region which in many ways represents “ground zero” of the Eurozone’s fatal flaw. When the common currency was introduced, there was an implicit assumption that the longer Europe’s disparate economic regions were yoked under a common monetary policy, the greater would be the degree of economic convergence. In fact, nothing of the sort has occurred. A region like Reggio Calabria has remained one of the most depressed in the entire Eurozone, largely because of the absence of targeted fiscal policies to address pre-existing regional disparities. And these disparaties have been exacerbated through the misconceived embrace of fiscal austerity. Botta’s work challenges the theoretical assumptions underlying the theory of “fiscal austerity expansions”, and offers an alternative growth policy to help the EU out of its current policy cul de sac.

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