Europe in a dilemma: national interest outweighs community spirit

The Eurozone has failed to solve its structural problems since the sovereign debt crisis; nor does the Union seem prepared for any economic downturn. It would make total economic and political sense for core as well as periphery countries to put their own short-term interests to one side a little, in order to improve the economic performance of the Eurozone as a whole.

Solutions could include a European monetary fund, provided it was able to provide financial assistance and was also given the power to actively influence the fiscal policy of a member state and impose sanctions if necessary. A functioning Union also requires the loss of a bit of freedom. A more expansionary fiscal stance would be very sensible in the event of deteriorating economic conditions. This might include investment incentives for companies, bringing forward public spending, and tax breaks for private households. However, this would need to be done in a targeted and coordinated way. In addition, investors would expect a greater fiscal commitment from financially stronger countries than from the weaker ones

Discussed structural policy reforms at a glance

Experience tells us this is unlikely to happen in practice. Structural policy reforms within the Eurozone continue to be undertaken on the basis of a lowest common denominator, as countries worry that others could benefit more than they do (prisoner’s dilemma). The Eurozone currently lacks an efficient set of tools for addressing growing economic divergence as well as economic risks in a coordinated fashion. Instead, we can expect to see individual countries reacting on the basis of their own national interests in the event of an economic downturn. It must be feared that the most heavily indebted countries – such as Italy – will breach EU fiscal rules and take a more expansionary approach than other countries – even if there is a danger of bondholders penalising these countries and subjecting their securities to a rerating.

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