Author-Meets-Critics: Alison Johnston's "From Convergence to Crisis: Labor Markets and the Instability of the Euro"

What can explain Eurozone member-states’ divergent exposure to Europe’s sovereign debt crisis? Deviating from current fiscal and financial views, this book offers a labor market narrative that distinguishes the crisis’s winners from its losers.  It argues that Europe’s monetary union was structured in a way that advantaged the corporatist labor markets of its Northern European economies in external economic activity (trade and cross-border financial lending).  Northern Europe’s distinct economic advantage lies not with its fiscal capabilities, which were not that different from the EMU South, but with its wage setting institutions.  Through highly coordinated collective bargaining, the EMU North could persistently undercut the inflation performance of their Southern trading partners, destining them to a perpetual cycle of competitive decline and external borrowing, which would require abrupt changes in economic and financial activity—the kind that only crisis can produce—to correct. While Northern Europe’s corporatist labor markets were always low inflation performers, monetary union made these features toxic for the South.  EMU’s institutional predecessor, the European Monetary System, included economic and institutional mechanisms to promote external macroeconomic adjustment and convergence between the common currency’s corporatist and non-corporatist economies.  EMU’s removal of these mechanisms allowed external imbalances between these two blocs to grow unchecked, which ultimately underpinned the crisis Europe currently finds itself in.  Rather than achieving its goal of an ever-closer-union, this book highlights that the EU’s common currency produced a monetary environment that destabilized economic integration between its diverse labor markets.