Working Paper

How a Flawed Structure is Hurting the Eurozone—Economically and Politically

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The wind appears to be back in the sails of the Eurozone economy ….

Not so long ago, the Euro-project did inspire serious doubt, not hope, as a big part of the Eurozone economy was stuck in deep recession, a far-right populist wave was sweeping over its polity, and Eurozone policymakers appeared paralyzed, unable to cope with the unforeseen. But economically speaking, those days are over—or so it seems. The Eurozone economy now is in recovery mode, recording the highest and most broad-based economic growth since 2011 (at 2% in 2016/17) and growing faster than both Britain and the U.S. Eurozone unemployment, which is still high, is finally coming down. Short-run economic prospects look favourable. Little wonder that European Commission President Jean-Claude Juncker was upbeat during his annual state-of-the-union address in September, proclaiming that “the wind is back in Europe’s sails.”

Politically, there was a burst of optimism after the Dutch and French elections. But hopes that the election of President Macron and the re-election of Chancellor Merkel marked the end of what was believed to be an irrepressible populist wave, are clearly an oversimplification, and the optimism is ebbing again, because the political drift to the right has remained, witness the election result of the German AfD. The recent rightward lurch in Austria, with the People’s Party (ÖVP) and the Freedom Party (FP) emerging as the big winners, with 32% and 26% of the vote respectively, is the latest reminder that the populist ferment in Europe is far from dead. Mrs. Merkel will be only too conscious of this; her party lost an important regional election in its one-time stronghold in Lower Saxony in early October.

This Note cautions against the renewed confidence and Mr. Juncker’s optimism about the economic recovery of the Eurozone. The Eurozone has suffered and continues to suffer from a faulty construction and flawed policies—leading to internal contradictions which, when left unadressed, show up in a deepening dualization of the Eurozone economy, both between member states and within the economy of each member state. The EMU reinforces structural inequalities between member states as well as dualism (or polarization) between social groups within countries. This ‘dualization’ is sure to fire up the considerable popular discontent on the continent. History shows that it does not take a lot to bring down societal order and for the economy to collapse.

…. but the currents may still not be good