Understanding the Political Economy of the Eurozone Crisis

Abstract

The Eurozone crisis constitutes a grave challenge to European integration. This essay presents an overview of the causes of the crisis, and analyzes why has it been so difficult to resolve. It focuses on how responses to the crisis were shaped by distributive conflicts both among and within countries. On the international level, debtor and creditor countries have fought over the distribution of responsibility for the accumulated debt; countries with current account surpluses and deficits have fought over who should implement the policies necessary to reduce the current account imbalances. Within countries, interest groups have fought to shift the costs of crisis resolution away from themselves. The essay emphasizes that the Eurozone crisis shares many features of previous debt and balance-of-payments crises. However, the Eurozone’s predicament is unique because it is set within a monetary union that strongly constrains the policy options available to policymakers, and vastly increases the interdependence of the euro crisis countries on each other. The outcome of the crisis has been highly unusual, because the costs of resolving the crisis have been borne almost exclusively by the debtor countries and taxpayers in the Eurozone.