IEB Report

Political Economy

An analysis of fiscal federalism in the EU

IEB Report 3/2015

The Great Recession has revealed serious shortcomings in the design of the monetary union, a set of shortcomings that have led to serious imbalances, above all with regards to external debt and current account balance, in the less competitive countries of the euro area (the so-called peripheral countries), as well as between these peripheral countries and the core countries of the eurozone.
These imbalances did not suddenly appear when the crisis broke out, neither are they a consequence of it, rather just the reverse. The crisis highlighted just how severe they were and just how unsustainable they had become, bringing about the closure of the financial markets. Indeed, the imbalances had been allowed to gradually build up during the boom years, in the face of the widespread indifference and unawareness of all the economic agents – the national central banks, the ECB, regulators, governments, markets, rating agencies, debtors (who got into deeper debt than they could afford) and creditors (who assumed more risks than was prudent).