A Path-Dependent Deadlock: Institutional Causes of the Euro Crisis

We argue that the characterization of the financial turmoil in the European Monetary Union as merely a sovereign debt crisis is inaccurate insofar as the deterioration of public finances represents the culmination of a process: legal and institutional flaws laid the ground for a public debt crisis. The institutional failure was the embedding of a unified monetary policy accompanied by a failure to introduce a coordinated fiscal and labor policy. The latent consequences of these flaws were brought into full view with the onset of the Global Financial Crisis. There was a lack of real convergence between the countries of the core (Germany) and the periphery (especially Greece, Ireland, Italy, Portugal and Spain, the so-called GIIPS.) This was exacerbated by the “one-size-fits-all” monetary policy, distorted fiscal policy, and the lack of a common approach to wage determination.[1] In sum, instead of fostering learning and convergence, the asymmetric EMU design catapulted the GIIPS and Germany onto divergent growth paths, which ultimately translated into “destabilizing macroeconomic imbalances.” This analysis will draw upon knowledge-production systems and learning theories in order to contribute to a deeper understanding of the EMU crisis. In particular, we take a contextualized approach by examining the path-dependent evolution of the EMU and how institutional failures have turned the GFC into a sovereign debt crisis.