THE CLINICAL PICTURE OF THE EUROZONE CRISIS: WHETHER THERE ARE GROUNDS FOR OPTIMISM?

Abstract

Following the short history of the Eurozone crisis, identification of its underlying cause and corollaries of the thus far wrong therapy, this paper points out indicative symptoms of heterogeneity, disfunctionality and disunity among the Core and Peripheral EMU members. Even though larger federal budget, treasury and common fiscal policy are neither politically feasible nor practically straight forward to implement, existing fiscal compact in absence of any redistributive transfers and more meaningful cohesive funds also do not represent even a mid-term sustainable response. However, clear and present danger for the Eurozone in the short run is represented by macroeconomically untenable constellation of Italy, which is more than proverbial Greece the weakest link in the monetary union. In addition and provided that Eurozone weathers Italian threat, paper synthesizes a set of pseudofiscal, monetary and financial policies crucial for the long-term survival of the EMU, with inpassing remark that almost all of them are being adamantly vetoed by the EMU’s Core or remain under construction still. In spite of the fact that ECB’s QE succeeded in somewhat lowering the currency risk (redenomination risk), credit risk continues to lurk in absence of the credible lender of last resort, mutualised Eurozone’s safe asset and better coordination of fiscal policies in the EMU. Notwithstanding slim chances for premeditated disintegration of the Eurozone, marginal cost of hesitation is on the rise and it just could so happen that financial contagion out of spontaneously forced exit(s) puts into jeopardy the very fate of the common European currency. The last quarter of 2017, after Italian and German elections, may prove to be the high time for fundamental reform of the Eurozone, if the aim is to preserve its relevance and present size.