The Eurocrisis: Muddling through, or on the Way to a More Perfect Euro Union?

Abstract

This paper looks at the short history of the Eurozone through the lens of an evolutionary approach to forming new institutions. The euro has operated as a currency without a state under the dominance of Germany. This by itself may be good news, as long as Germany does not shirk its growing responsibility for the euro’s future. This would require Germany to invest more in upgrading Eurozone institutions and balancing its dominance gains with the economic and political responsibilities that come with it. Germany’s resilience and dominant size within the EU may explain its ‘muddling-through’ approach toward the Eurozone crisis: doing enough to prevent the unraveling of the Eurozone while resisting policies that may mitigate the depth of the crisis if they involve short-run costs to Germany. We review several manifestations of this muddling-through process. Germany’s attitude toward the Eurozone resembles the attitude of the United States toward the Bretton Woods system in the 1960s – benign neglect of the growing tensions, which led to the ultimate demise of the Bretton Woods system. Chances are that unraveling the Eurozone would be much more costly than the end of the Bretton Woods regime. One hopes that the muddling-through process would work as stepping-stones toward a more perfect euro union, yet hope may not be enough to deliver it.