Since mid-2012, the eurozone crisis has been in remission. The period of relative calm which has prevailed since then has not been the product of an upturn in economic fortunes: until the recent summer uptick, the eurozone had suff ered six consecutive quarters of declining activity and rising unemployment (a result in part of synchronised fi scal austerity across
the region as a whole). Instead, the period of peace has refl ected two factors: the increased willingness of the European Central Bank (ECB), under Mario Draghi’s presidency, to act as a lender of last resort to governments; and a belated recognition by European leaders that the eurozone suff ers from design fl aws that need correcting. Sadly, the success of the fi rst factor
appears to have had unfortunate consequences on the second.
A design fl aw that was not spotted by critics when the eurozone was launched, and that only
became apparent after the 2008 fi nancial crisis, was the instability of a fi scally decentralised
currency union backed by a limited mandate central bank. This confi guration, it turned out,
gave rise to stresses in the eurozone that did not arise in the US. The most destabilising of
these was the emergence of ‘doom loops’ in which fragile banks and fi scally weak sovereigns
undermined each other. Reducing memberstates’ vulnerability to these spirals required
the eurozone to establish a banking union. The trouble, however, is that the ECB’s success in
lowering government bond yields in countries like Spain and Italy appears to have reduced thesense of urgency felt by European leaders to build a banking union.
the region as a whole). Instead, the period of peace has refl ected two factors: the increased willingness of the European Central Bank (ECB), under Mario Draghi’s presidency, to act as a lender of last resort to governments; and a belated recognition by European leaders that the eurozone suff ers from design fl aws that need correcting. Sadly, the success of the fi rst factor
appears to have had unfortunate consequences on the second.
A design fl aw that was not spotted by critics when the eurozone was launched, and that only
became apparent after the 2008 fi nancial crisis, was the instability of a fi scally decentralised
currency union backed by a limited mandate central bank. This confi guration, it turned out,
gave rise to stresses in the eurozone that did not arise in the US. The most destabilising of
these was the emergence of ‘doom loops’ in which fragile banks and fi scally weak sovereigns
undermined each other. Reducing memberstates’ vulnerability to these spirals required
the eurozone to establish a banking union. The trouble, however, is that the ECB’s success in
lowering government bond yields in countries like Spain and Italy appears to have reduced thesense of urgency felt by European leaders to build a banking union.
