14

The Eurozone is Still Vulnerable

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 be sure, reforms that were implemented in response to the last crisis have improved the situation at the aggregate level; but they have not resolved the eurozone’s fundamental asymmetry. Underlying fiscal positions still vary from one country to another, despite all the efforts to achieve fiscal convergence through top-down rules.