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Why can’t Europe save itself? A note on a structural failure

Abstract

Europe's Economic and Monetary Union (EMU) has been struck by one financial crisis after another. Yes despite many bold new initiatives, instability and uncertainty persist. Why can't Europe save itself? The answer, this chapter argues, lies in a structural failure. EMU lacks a credible mechanism to cope with the threat of imbalances within the group – a framework to manage the European region's internal payments problems. The challenge was foreseen from the beginning. How could a regional monetary union manage the risk of fiscal imbalances among its members? Europe might have turned to the USA for inspiration. For analytical purposes, the USA too can be considered as a regional monetary union comparable to EMU, facing the same fundamental challenge. America's solution was to create a permanent ‘transfer union’, featuring more or less automatic flows of funds through the federal budget at the centre. But European policy-makers chose otherwise, for reasons that go to the very heart of their ongoing integration project. EMU is a league of sovereign states, each determined to retain for itself as many rights and privileges as possible. In such a structure, a permanent transfer union never had a chance; and since no adequate substitute has yet been found, Europe is forced to pay a high price in terms of instability and lost growth.

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