What Really Ails the Eurozone?: Faulty Supranational Architecture

Contemporary Economics, Vol. 6, No. 4, pp. 10-18, 2012

10 Pages Posted: 10 Jan 2013

See all articles by Assaf Razin

Assaf Razin

Tel Aviv University - Eitan Berglas School of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Steven S. Rosefielde

University of North Carolina (UNC) at Chapel Hill - Department of Economics

Date Written: December 7, 2012

Abstract

The global financial crisis which erupted in the United States instantaneously swept across Europe. Like the United States, the European Monetary Union (EMU) was ripe for a crash. It had its own real estate bubble, specifically in Ireland and Spain, indulged in excessive deficit spending, financially deregulated, and rapidly expanded credit. Policy responses and recovery patterns for key EU members like Germany, France (within the Eurozone) and the United Kingdom (outside the Eurozone) were similar. However, after the bubble burst and the crisis began unfolding it became clear that the Eurozone plight differed from America’s in one fundamental respect. There was no exact counterpart of Eurozone GIIPS (Greece, Italy, Ireland, Portugal and Spain) in the United States.

The disparity is traced to the EU’s and Eurozone’s special form of governance called 'supranationality' (a partially sovereign transnational organization) that has been largely ignored in economic treatises about the costs and benefits of customs unions, economic communities, and monetary unions. EZ members have put themselves in a monetary cage, akin to the gold standard. Member states have surrendered control over their monetary and foreign exchange rate policies to the German dominated European Central Bank (ECB), without supplementary central fiscal, private banking and political union institutions. This should be enough in general competitive theory, but too often leads to factional and societal gridlock that compounds the misery, and could cause the EU to permanently and gravely underperform relative to community’s 'un-caged' potential.

Keywords: single currency area, supranationality, EU, EMU

JEL Classification: E0, F0, F02, F5, F30

Suggested Citation

Razin, Assaf and Rosefielde, Steven S., What Really Ails the Eurozone?: Faulty Supranational Architecture (December 7, 2012). Contemporary Economics, Vol. 6, No. 4, pp. 10-18, 2012 . Available at SSRN: https://ssrn.com/abstract=2198312

Assaf Razin (Contact Author)

Tel Aviv University - Eitan Berglas School of Economics ( email )

P.O. Box 39040
Ramat Aviv, Tel Aviv, 69978
Israel
+972 3 640 7303 (Phone)
+972 3 640 9908 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Steven S. Rosefielde

University of North Carolina (UNC) at Chapel Hill - Department of Economics ( email )

Chapel Hill, NC 27599
United States

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