Political Idealism and Economic Realism: A Forced Marriage to Preserve the Eurozone

Abstract

Political idealism has prevailed over economic realism in the EU decision process. As a result, today’s Eurozone is a puzzle with too many missing pieces. Given the severity of the crisis, policymakers would be well advised to urgently take both structural and pragmatic measures to preserve the Eurozone, as proposed in the paper. Although the discussion about the right balance between fiscal rectitude and support for demand is useful, the fundamental challenge for Europe is to rethink the ‘welfare state’ model that has prevailed over the past 50 years or so. Political idealism can no longer ignore the significant intergenerational economic constraints that Europe faces today in a world in which it can no longer dictate the terms of exchange. What Europe desperately needs is a new and realistic vision for the 21st century.

Keywords: Eurozone crisis, financial regulation, structural measures, stability

JEL Classification: G00, G01, G28