Briefing Paper

Nicholas Crafts
Saving the Euro: A Pyrrhic Victory?
  • The survival of the euro has entailed a lengthy recession and has left an ominous legacy of public debt, but the fundamental flaws in its original design have not been corrected.
  • In the 1930s the collapse of the Gold Standard was an integral part of the recovery process from the Great Depression, but many policy-makers believe that to mimic this approach in the case of the eurozone today would be too risky.
  • Fiscal consolidation alone seems inadequate to address the fiscal sustainability problems of highly indebted economies in the euro area; financial repression and debt relief will also be needed to address the debt overhang.
  • The design of the European Central Bank is not helpful for spearheading economic recovery in the present circumstances. Indeed, a ‘subservient’ 1950s-style central bank, rather than an independent one, would be more effective.
  • The crisis has inflicted significant damage to future growth prospects in the eurozone, both through the debt legacy it has created and in terms of the impetus it has given to detrimental supply-side policies.
  • The euro has probably been saved, but this has come at a very high price, resulting in what may well be a ‘lost decade’ for southern Europe.

This paper is part of the project Shifting Competitive Advantage in the Global Economy.

Launch Event

Saving the Euro: A Pyrrhic Victory?
27 November 2013