Three forms of macroeconomic stabilisation in the eurozone are considered: national macroeconomic stabilisation, debt discipline and eurozone-wide macroeconomic stabilisation. The eurozone started with an architecture that ignored the ﬁrst, which it hoped – despite advice to the contrary – would look after itself. This article explores what subsequently happened before the ﬁnancial crisis, during the Great Recession and after 2010. It argues that the failure to address the issue of national macroeconomic stabilisation was a crucial factor behind what became an existential crisis for the eurozone. However, the crisis has a silver lining. The rationale behind union-wide controls to limit ﬁscal deﬁcits (the SGP and now the Fiscal Compact) no longer exists. Since 2010 it has become clear that eurozone members face greater market discipline on ﬁscal deﬁcits than do countries with their own currency. As a result, ﬁscal controls and institutions to support them can and should reside at the national level, and can therefore focus on national stabilisation as well as the more long-term control of government debt. It is argued that this alternative to the current architecture is both more feasible and more desirable than a move towards ﬁscal union.
The original eurozone architecture was ﬂawed for reasons understood at the time – why was this ignored?
The eurozone crisis from 2010 had its roots in this ﬂawed architecture, yet the architecture has been reinforced.
The original rationale for union-wide controls on ﬁscal deﬁcits has disappeared following 2010. The Fiscal Compact is not only damaging; it is unnecessary.
Moving the eurozone towards greater subsidiarity, and not greater ﬁscal union, is the better path.