Resolution for the Eurozone Crisis: An Analysis of the Root Causes, Consequences of Current Policies, and Potential Economic and Structural Solutions
30 Pages Posted: 1 Feb 2013
Date Written: October 23, 2012
The paper provides a comprehensive overview of the historical problems and causes of the crisis, explains the choices available for the peripheral EU countries and the potential consequences, and discusses potential solutions which take into account how the EU operates. The Eurozone still makes sense in order for Europe to compete in an increasingly globalised economy, and the paper suggests a new framework to provide longer-term stability for the Euro currency. Highlights include:
Causes and consequences: 1) Growth is the only viable way out of the crisis but not in the current way being proposed (pg.1). 2) The Eurozone's framework was known to be flawed by the politicians who created it; its inception was a political compromise (pgs. 3 and 9). 3) The flaws of the Eurozone were compounded by trade policies of emerging market countries, reforms made by Germany with its Agenda 2010 programme, and a decline in Eurozone interest rates (pg.4). 4) Past currency devaluations have shown that the peripheral EU countries would not be better off from exiting the euro, so restructuring is the only way for them to maintain their current living standards (pg.10).
Necessary long-term changes: 1) Change in public mentality which has been in place since the development of the welfare state after the Second World War (pg.15). 2) Germany's own reforms provide a framework for what is required in peripheral countries (pg. 16).
Short-term support for the economy: 1) Printing money and creating moderate inflation is necessary to help resolve the crisis; this policy was used effectively by the likes of the UK after the Second World War (pg. 19). 2) Channeling monetary stimulus into the real economy requires injecting capital in a particular way which takes advantage of their retail branch networks' access to customers (pg. 22). 3) The necessary reforms to business regulations and practices may be beyond the political will of the peripheral countries; an alternative ability to incorporate companies directly under EU directives rather than local country law would be an easier way to introduce reforms (pg. 25). 4) Structuring a Eurobond in a particular way which would incentivise fiscal responsibility (pg.26).
Keywords: Eurozone, Euro, EU, Maastricht, ECB, European Union, European Central Bank, Crisis
JEL Classification: A00, B20, E20, E40, E50, E60, F10, F30, F40, F50, F60, G00, H00, J30, K20, N00, O00, P10
Suggested Citation: Suggested Citation