The State Strikes Back: The German Rescue of the Eurozone

The institutional structure of the EU’s Economic and Monetary Union (EMU), designed under the auspices of the 1989–91 Maastricht IGC, and modified following the 1992 and 1993 ERM exchange-rate crises, was fundamentally flawed. Monetary sovereignty was effectively shared between the ECB and member governments. National finance ministries monopolized fiscal policy; member governments retained control over debt issues; and national central banks were responsible for regulation the financial institutions.

This paper analyzes how EU policymakers approached the Eurozone crisis. First, it focuses upon Germany’s leadership during the Greek crisis, and the imposition of harsh austerity measures in the only member state where a Eurozone defection was likely. Second, this paper discusses the extent to which policymakers considered the Greek bailout as potentially destabilizing to the future and stability of the euro. Third, this paper considers the alternatives that policymakers considered, including a Greek default; the repercussions of abandoning the Eurozone; and reintroducing the new drachma as the national currency. The paper also considers Germany’s relative power within the Eurozone and how this influenced its behavior and actions towards the trade-surplus core economies and the weaker economies on the Eurozone’s periphery.