EMU and the Greek crisis: testing the extreme limits of an asymmetric union

Abstract

ABSTRACTEMU structural asymmetries contributed directly to both procyclical debt-fuelled growth pre-crisis and sharply recessionary adjustment post-crisis. Greece’s fiscal and debt crisis represented an ‘orthodox’ national failure inside EMU, yet the underlying reason for the Euro-Area financial crisis was external imbalances generated by EMU asymmetries. Exclusive reliance on internal devaluation, lack of a Euro-Area countercyclical response, and financial fragmentation, all accentuated the cost of asymmetric adjustment to crisis. The asymmetric EMU institutional framework also necessitated a greater reliance on intergovernmental activism to engineer ad hoc interventions, at the expense of both the Community method and democratic procedure. Financial markets mispriced sovereign risk, failing to counterbalance EMU asymmetries. The Greek crisis prompted the Euro Area to develop stronger policies and institutions and to eschew an extreme existential challenge. EMU is stronger at 20, yet with persisting asymmetries, old and new, and insufficiently equipped to face the next major crisis.