The Eurozone Crisis: Muddling through on the Way to a More Perfect Euro Union?

• Main Author: Joshua Aizenman
• Format: Article
• Language: English
• Published: MDPI AG 2013-10-01
• Series: Social Sciences
• Subjects: the euro crisis; structural distortions; financial distortions; reforms
• Online Access: http://www.mdpi.com/2076-0760/2/4/221

Taking a historical perspective of economic changes, this paper argues that muddling through crises-induced reforms characterizes well the evolutionary process of forming currency unions. The economic distortions facing the euro include structural challenges in the labor and product markets, and financial distortions. While both structural and financial distortions are costly and prevalent, they differ in fundamental ways. Financial distortions are moving at the speed of the Internet, and their welfare costs are determined more by the access to credit lines and leverage, than by the GDP of each country. In contrast, the structural distortions are moving at a slow pace relative to the financial distortions, and their effects are determined by inter-generational dynamics. These considerations suggest that the priority should be given to dealing with the financial distortions. A more perfect Eurozone is not assured without successfully muddling through painful periodic crises.