Euro After the Crisis: Key Challenges and Resolution Options
Prepared for: GUE/NGL Group, European Parliament, October 2015
63 Pages Posted: 31 May 2016
Date Written: May 30, 2016
The recent Global Financial Crisis (2008-2010) and the accompanying Great Recession (2008-2011) show that the level and the rate of monetary and financial systems integration deployed within the Euro area is not sustainable in the long run. Instead of acting as a buffer against external shocks and internal imbalances within the Euro area, the common currency has acted as a driver, firstly, of some imbalances that prompted the crises, and as a factor restricting economies’ ability to deal with the real economic recession that followed the financial crisis.
Both, theoretical models of monetary policy integration and the recent empirical evidence show that in order to achieve functional common monetary policy, member states of a currency union must achieve fiscal and political unions. However, with full federal EU lacking democratic and popular mandate, a U.S.-styled centralised federalisation does not represent a feasible alternative for the EU.
As the result, to prevent a disorderly unwinding of the Euro area over time and the accumulation of significant long-term economic costs of maintaining the current status quo, the EU should pursue a restructuring of the EMU along the following lines. Firstly, the Euro area should be reduced to a core group of states financially, fiscally and politically ready to undertake both a full monetary and political federalisation. Secondly, core EU institutions should be reformed toward achieving a bottom-up democratically anchored momentum toward a Swiss-styled confederation, retaining significant member states’ autonomy on core competencies.
Keywords: Euro, Euro area, European institutions, monetary union, currency union, financial reforms
JEL Classification: E44, E52, E53, E58, E61, E63, E65, F02, F33, F36, F42, G18, G21
Suggested Citation: Suggested Citation