In This Review

From Convergence to Crisis: Labor Markets and the Instability of the Euro
From Convergence to Crisis: Labor Markets and the Instability of the Euro
By Alison Johnston
Cornell University Press, 2016, 248 pp

This book analyzes the ongoing eurozone crisis on the basis of a simple but penetrating insight about the domestic politics of the currency union’s member states. Johnston rejects the flawed notion that the crisis is the result solely of government overspending or a one-time financial shock. Instead, she borrows the “varieties of capitalism” theory, which maintains that each European state has institutions for regulating economic activity that differ fundamentally from those of its neighbors. For example, the powerful, centralized unions of northern European countries such as Germany have long tended to eschew wage increases in the interest of maintaining export competitiveness. Prior to adopting the euro, southern European countries with less centralized labor-market institutions tended to offset wage increases by depreciating their currencies or tightening monetary policy. After the introduction of the euro, northern countries could continue to use their preferred strategy. But the single currency made it impossible for southern countries to do so. This explains why the crisis has damaged even those European countries that maintain sound fiscal policies and why the extended application of austerity measures has not restored the continent to economic health.