EU MONITOR: Eurozone Reform: A Victim of Political Economy

Linda Zeilina, in her latest EU Monitor, explores the topic of Eurozone reform from the perspective of political economy.

You can view the whole publication here and download the PDF file on the right side of this article.

  • With a new European Commission and a new head of the European Central Bank (ECB), the Eurozone is set to have new leadership and an opening for positive change. As Eurozone faces old and new challenges, it is in dire need of improved capability to tackle both legacy and new problems. 

The lack of progress with Eurozone governance reform also is a symptom of a greater issue: the EU collective action problem due to different perceptions of interests, risks and solutions. While the so-called Eurozone core countries (predominantly Germany and the Netherlands, but lately also some Eastern European countries) are increasingly worried about moral hazard and risk reduction, the Southern periphery countries such as Greece, Spain and Portugal have been more focused on risk-sharing. 

Germany’s current account surplus means it does have the ability to launch a fiscal stimulus domestically, with potential effects on the wider Eurozone. The priority for investment should be to modernise Germany’s and other European countries’ outdated infrastructure, and to invest in other public goods. 

Yet the one biggest boost for European economies would be for the new Commission to work on rejuvenating the EU’s single market, especially focussing on the liberalisation on services. The single market was originally created to liberalise trade in goods, which was the main output of the EU economies. But like in other developed economies, the share of services is increasing.

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