Blind Policies in the European Union

The drama that has been playing out in the eurozone over the past year began as a farce but now looks increasingly like a tragedy. A grand experiment in monetary union without political union – that some always saw as the temporary triumph of political will over economic constraints – is now unravelling. The reasons are partly related to the very design of the eurozone: it is rare, if not impossible, to find long-lived examples of monetary union that do not have a significant degree of fiscal federalism explicitly incorporated in them. With the exchange rate removed as a potential policy instrument, current account imbalances between different regions of the common currency area may rapidly become unsustainable if fiscal transfers are not assured.

Another aspect of the matter that receives little attention is the question of how such large imbalances – and, therefore, such large variations in domestic price levels in different eurozone countries – could have emerged at all when the single market was supposed to generate unrestricted flows of goods and services as well as free flows of labour and capital. The failure of the single market to deliver on this front is surely an important underlying cause of the current crisis.