The Eurozone’s Achilles Heel

On 25 January 2015 Greece ushered in the New Year with the election of the leftist SYRIZA party to parliament. All eyes are now on Greece and her new Prime Minister, Alexis Tsipras, in hopes that he will compromise and continue austerity reforms in light of his country’s increasing national debt. Recently, however, Tsipras has denounced much of the austerity package that was imposed as a requirement for bailouts the Greek government received from the Eurozone. Tsipras and his ministers are now in talks to maintain 70 per cent of the old administration’s reforms but continue to increase welfare programs for the Greek people. Such reforms include the increase of the ‘minimum wage to pre-crisis levels, reverse labour-market reforms, restore pension increases, rehire thousands of public servants and scrap privatisation projects’. These new welfare programmes now place Greece on a collision course with the countries inside the Eurozone who are the primary holders of Greece’s foreign debt. This backtrack of the agreed bailout conditions has received a strong backlash from Greece’s creditors especially Germany. Germany’s finance minister, Wolfgang Schäuble, gave a stern ‘no’ to Greece’s call for German support once again as Greek available funds are beginning to dwindle.

Image courtesy of the author.
Image courtesy of the author.


The standoff between Greece and the rest of the countries associated with the Euro Zone has unearthed a much larger issue in this economic system. The calamity of the Greek financial meltdown was largely due to poor fiscal policy by the Greek government. The lack of a unified fiscal policy that stretches over the Euro Zone is the main hurdle it must overcome to hedge against another Greek tragedy. The fiscal policy in the Eurozone today does not reflect the monetary policy employed. While the Euro has a set interest rate decided by the European Central Bank, but there is no solidified fiscal policy for all Eurozone members that would support the Euro. The Eurozone has been proactive in attempting to unify fiscal policy with the introduction of the Stability and Growth Pact, which allows countries to coordinate fiscal policies. However, each European country freely chooses its own fiscal policy based on the idea of national sovereignty.


As it is presently situated, the Eurozone is standing with feet on different stools. On the one hand the Eurozone is a triumph for cosmopolitanism and unity within the continent of Europe. On the other it still retains the vestiges of the Westphalian system that champions national sovereignty, as reflected in domestic control over fiscal policy. The forced marriage of these two ideologies has produced an interesting dilemma in regards to the economic prosperity of the Euro Zone. The result of each Eurozone member controlling their fiscal policy had the unintended consequence of affecting the economic prosperity of all countries that use the Euro. In the case of Greece the uncontrolled spending of its government has plunged the Eurozone into a state of near crisis. If Greece defaults on its debts, there might be global implications that would ripple throughout the world market.

Image courtesy of PBS © 2015, some rights reserved.
Image courtesy of PBS © 2015, some rights reserved.

The Greek crisis has highlighted the need to solidify a European banking system and a fiscal policy that would encompass all states in the Eurozone and usher in a new era of cosmopolitanism. Separating the monetary policy from fiscal policy has proved to be a recipe that does not bode well for the economic future of those attached to the Euro. Without some unifying structure to manage the Euro’s imbalances the Eurozone will always be susceptible to economic volatility.  Bank of England Governor Mark Carney recently pushed Eurozone officials to facilitate a deeper fiscal union in order to strengthen the European economy. The need of a standardized fiscal policy is relevant now more than ever in order to combat the ever-increasing SYRIZA demands of financial irresponsibility.


States, for example, that have control over their monetary and fiscal policy, have an easier time adapting to the ever-changing market landscape.  States with a married fiscal and monetary policy can manipulate interest rates, raise or lower taxes, balance budgets, and curtail expenditures. Controlling both aspects of policy allows for more flexibility in the face of economic shocks and in many instances curtail another Greek crisis. The EU is rapidly moving towards a cosmopolitan union therefore the next step for the economic prosperity of the Eurozone is the marriage of fiscal and monetary policy.


Despite the benefits of implementing a unified fiscal policy for the Eurozone the issue of national sovereignty does hold weight. Allowing a central entity to control all Eurozone member nation’s fiscal policy is quite intrusive.  The states themselves would have to give up fundamental rights to a power outside their own borders for the sake of a united Europe.


As Tsipras meets with foreign ministers this week to discuss a possible solution to the Greek crisis a lot more hangs in the balance than a simple bailout. The issue of financial control over Greece’s fiscal policy by the EU is on the table, which would threaten Greece’s sovereignty. It will be fascinating to see what precedents come about with the conclusion of the Greek/EU talks and what the future holds for the Eurozone.

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