The Eurozone crisis, the defective policy response and the need for institutional innovation

The recent economic evolution after the Eurozone crisis has revealed some crucial weaknesses of the Economic and Monetary Union (EMU): in Section 2 we shall review how the original construction fails to match some well-known requisites of standard economic theories (e.g. the “optimum currency area” theories). In Section 3 there will be a critical appraisal of the events that, commenced with the global financial crisis, passing through the Great Recession, culminated in the sovereign debt crisis: emphasis will be placed not only on the innovations introduced in EU governance (the new EFSF and ESM funds, the non-conventional measures of the ECB, etc.), but also on the mistakes and delays of the EU policies. A brief account of the recent macroeconomic evolution in the EU, with particular reference to economic growth and public finance, will be presented in Section 4. Then, Section 5 will try to explain the reasons that induced EU institutions and governments to adopt tough austerity measures; we shall also emphasize the consequences of these policies, in particular the “self-defeating” effects of fiscal consolidation. Finally, in Section 6 we shall investigate some future scenarios, also in order to search for solutions to the mentioned failures and weaknesses