Part of Foreign Affairs Report: The Future of the Eurozone

Avoiding the Next Eurozone Crisis

How to Build an EU that Works

The Greek debt crisis has shaken the euro just in time for its 10th birthday. This latest challenge should have come as no surprise; it would have been a miracle had the currency been immune to such problems. If anything, the past few years have shown that although the euro is a remarkable construct, it is incomplete: the eurozone is financially unified but not yet politically unified enough. This deficiency underlies the euro’s current problems and makes them more difficult to address.

Monetary unity entails a much greater degree of political unity than many European commentators, politicians, academics, and publics assumed it would. In a monetary union, political decisions taken in one country affect the economies of other countries in very direct and sometimes dramatic ways. This means that many national problems can only be dealt with jointly, across the whole currency area. The Greek economy accounts for only two percent of eurozone GDP, but its current sovereign debt crisis is causing economic instability throughout the whole region. It needs to be resolved through tough political decisions in both Athens and Brussels; it will be up to the Greek government to implement any economic adjustment program, but the financing for that plan is in the European Council’s hands.

The EU’s current institutional framework does not allow for smooth European decisionmaking. Political life in Europe is still essentially domestic. Economic policies are created individually, and largely with national interests in mind. There are very few bodies that hold a eurozone-wide perspective, the European Central Bank being one of them. Unlike other institutions that coordinate policy among eurozone nations, the ECB is tasked with implementing a single monetary policy -- one interest rate -- for all of them. This forces it to look at the overall macroeconomic and financial picture.

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