The eurozone remains fragile and uninsured against the risk of another crisis, not least because it is still vulnerable to asymmetric boom-and-bust cycles. Although reforms that were implemented in response to the last crisis have improved the situation at the aggregate level, efforts to achieve fiscal convergence have failed.
BRUSSELS – Despite recently experiencing an overall economic uptick, the eurozone remains fragile and uninsured against the risk of another crisis. And a major reason is that it is still vulnerable to asymmetric boom-and-bust cycles.
Simply put, while all eurozone members can benefit during good times, some suffer far more than others during busts. This means that whenever the next crisis hits, safety-conscious investors will flee from fiscally weak countries toward fiscally strong ones that have a proven track record of generating economic growth.
When the economic calculus reverses, we can expect to experience a sense of déjà vu. Each country’s gain will entail another country’s loss, which will undermine inter-eurozone cooperation and fuel political tensions. The effects will likely reverberate through each country’s domestic politics, strengthening forces that favor disintegration.
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BRUSSELS – Despite recently experiencing an overall economic uptick, the eurozone remains fragile and uninsured against the risk of another crisis. And a major reason is that it is still vulnerable to asymmetric boom-and-bust cycles.
Simply put, while all eurozone members can benefit during good times, some suffer far more than others during busts. This means that whenever the next crisis hits, safety-conscious investors will flee from fiscally weak countries toward fiscally strong ones that have a proven track record of generating economic growth.
When the economic calculus reverses, we can expect to experience a sense of déjà vu. Each country’s gain will entail another country’s loss, which will undermine inter-eurozone cooperation and fuel political tensions. The effects will likely reverberate through each country’s domestic politics, strengthening forces that favor disintegration.
To continue reading, register now.
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