CESifo Forum 201223 Special Issue THE EURO IN 2084

The Eurosystem stumbles from crisis to crisis as politicians seek to rescue bankrupt countries from their financial distress with huge sums and little suc-cess. At the same time economists have proposed con-structive solutions and mechanisms for exiting the cri-sis (EEAG 2011; Plenum der Ökonomen 2011). Yet there is no foreseeable progress in this direction and an end of the crisis is not in sight. Why? It will be shown in this article that the current political deci-sions are often constrained by decisions taken many years ago: history matters. This paper aims to shed some light on previous decisions that not only shaped the present form of the euro but also constrain today’s political action. An important starting point is the collapse of the sys-tem of Bretton Woods in 1973 and the institutions which subsequently emerged. In Europe some coun-tries adopted an ‘inflation regime ’ for their economies with the intention of using inflation as an extra stimulus for promoting economic growth, while others followed a ‘stability regime ’ based on stable prices and a reliable economic framework. The result was that the former lagged in growth behind the lat-ter, inducing the inflation regimes to exert a perma-nent political pressure towards fiscal equalization. Eventually, however, self-responsibility has proven to be the least common denominator. So the European Monetary System (EMS) has emerged as a viable framework of coexistence between the two antago-nistic groups of countries. The succeeding ‘euro ’ sys-tem from 1999 up to present, however, has resumed destructive elements of redistribution in its institu-tions. Therefore, the old struggle over fiscal equaliza-tion re-emerged in new forms. It will be shown why the self-correcting macroeconomic mechanisms were paralyzed and did not restore fiscal stability but instead produced huge public debts in some euro member states. This is why true reform is so difficult today. Those euro states that once pursued stability policies are in a minority today and unable to enforce sound rules of fiscal and monetary policy. The heirs of Bretton Woods: inflation regimes and stability regimes (1973–1991