The Winner-Take-All Politics of Europe’s Sovereign Debt Crisis: The Euro’s Institutional Design and the Politics of Unequal Adjustment

This paper argues that the euro’s institutional design makes it function during periods of stress like a European version of the interwar gold exchange standard. This has led to two different kinds of widening inequality, one domestic and one intra-European, both of which can be ‘process traced’ back to the flawed institutional setup of Europe’s single currency.

First, the creation of the euro, and the domestic reforms that came with it in the 1990s, resulted in a widening gap between rich and poor in both the Northern core and Southern periphery, with wealth inequality at an all-time high in Germany, and falling average incomes and rampant unemployment in the Mediterranean countries since 2010. Second, the European sovereign debt crisis has exposed a widening gap in GDP per capita between North and South. The seemingly “winner-take-all” surplus countries of Germany, Finland and the Netherlands have benefited from the crisis through lower debt, lower interest rates, faster growth, and relatively mild austerity measures and reforms. The “loser-pay-all” deficit countries of Greece, Italy, Spain, Portugal and Ireland have suffered from higher debt, higher interest rates, negative growth and Brussels-imposed austerity measures and structural reforms. The irony is that the creation of the euro – meant to unite Europe by bringing about broader political cooperation through economic convergence and to preserve the European social model – has led to economic divergence, questioning not only the sustainability of the European social model, but also the future viability of the European integration process itself.