The Slow Motion Train Crash of the Eurozone Monetary Alchemy

Abstract

This article is about the potentially losing battle to save the Eurozone in the long term. The Eurozone, the greatest achievement of the European Union, is losing its glamor and is in danger of losing its appeal as the promise of perpetual prosperity for every participant faded away. The Eurozone architecture was created on the grounds that is almost designed to fail. Various policies such as quantitative easing did not help boost economic growth as the best remedy for economic troubles. Profound federalist-type reforms are necessary if the Eurozone is to have a longer-term future. Policymakers have at least two urgent tasks to save the Eurozone. The first is to relax budgetary rules and to change the mandate of the European Central Bank to add growth and employment to the low inflation policy objective. The second is to introduce belatedly federal instruments such as a common budget, automatic stabilizers (transfers), fiscal and banking unions, a system for orderly default, common bonds, and a disputesettlement mechanism. This is a tall order that faces strong political barriers. The dissolution of the Eurozone would not be the end of the world, and the European Union would return to where it was in 1992. Preparations for the post-Eurozone Europe are necessary.