Hall, Peter A. "Varieties of Capitalism and the Euro Crisis". West European Politics, Vol.37, No.6 (2014): 1223-1243.

Hall, Peter A. "Varieties of Capitalism and the Euro Crisis". West European Politics, Vol.37, No.6 (2014): 1223-1243.

• The severity of the Euro Crisis was due to the failure of the European Monetary Union [EMU] to deal with tensions caused by different economic models used by different Eurozone countries (1223).
• Although there are exception, Eurozone countries generally fall into two categories: Northern European countries tend to operate export-oriented economies with innovative research and development, sophisticated vocation training, and high levels of cooperation and coordination between firms; Southern European countries have less organized economies, where rival factions of employers and unions compete against each other, research and development is less coordinated, and competitive advantage comes from low wages (1226).
• Because wages levels are nationally coordinated and set, and because their highly-skilled labor force has a high rate of savings, northern European economies generally do not need macroeconomic government policy to stabilize their economies. Southern European economies, on the other hand, needed consistent macroeconomic interventions, particularly through currency depreciation, to retain competitiveness and make up for high rates of domestic inflation (1227-1228).
• Northern European economies thus benefitted from joining the Eurozone, as their more competitive goods could now flood southern European markets without interference and the downward pressure of these poorer economies kept the euro exchange rate relatively low, thus making European goods more competitive internationally (1228).
• Southern European economies benefitted from the Eurozone through lower transactions costs, but were also no longer able to defer inflation through currency depreciation. Instead of economic collapse, however, the abundance of credit from northern European savings enabled massive borrowing in southern Europe and a consumption-led economic boom (1228).
• This massive expansion of credit in southern Europe further pushed up wages and prices in those countries, further decreasing their competitiveness both within the Eurozone and internationally (1228).
• The EMU was a political project designed to avoid the difficult intergovernmental negotiations to realign European exchange rates, of which 10 discussions had occurred between 1979 and 1992. Different countries saw the end of these negotiations as beneficial for different reasons: France believed the new system would reduce the power of Germany in these negotiations, and Germany believed the new system would stop other European nations from devaluing their currencies to undercut the competitiveness of German exports (1224).
• Germany was the country most reluctant to accept monetary union, but was convinced because the deal included a French promise to recognize German reunification and the Stability and Growth Pact, which limited sovereign debt to 60% and deficits to 3% (1224). 
• The design of the EMU was largely influenced by Neoclassical economic theory and thus purposefully limited macroeconomic management and interference in European economies. These prevailing doctrines, combined with disagreements among members states on any more active measures, led to a technocratic, political unresponsive, and undemocratic monetary system based around the European Central Bank [ECB], which was entirely independent and forbidden from purchasing sovereign debt (1224-1225). 
• The ECB was prohibited from directly purchasing government debt or transferring funds between governments, meaning that the weight of the Euro Crisis fell on other institutions that were unused to dealing with redistribution. These other institutions were slow, deliberative, dependent on intergovernmental consensus, meaning that whole response to the Euro Crisis was slow and arduous. The slowness of the response further eroded investor confidence, intensifying the crisis,  (1232-1233).
• European countries recognized that many national economies were uncompetitive and otherwise lacked the institutions to properly cope within the monetary union, but dismissed these concerns on the notion that membership in the monetary union would result in economic convergence within the EMU towards more competitive economic systems (1225).
• The appropriate response to prevent the 2008 debt crisis would have been for the ECB to raise interest rates and use other economic instruments to staunch credit flow. However, doing this would have potentially caused recession in northern Europe, where interest rates were already very high. Forced to choose between what was best for northern or southern European economies, the ECB kept interest rates unchanged to sustain northern European economies (1228).
• Some have claimed that Germany should have reoriented its economy towards domestic demand to lower its trade surpluses, and thus ameliorate the trade imbalances within the Eurozone. This is, however, unrealistic, as high levels of savings mean that German domestic demand does not expand with credit expansion or wage rises. The main effect of these policies is reducing German competitiveness, which could jeopardize exports and thus damage the economy because the domestic economy cannot generate the requisite demand (1229).
• In most of southern Europe, there is little that countries could have done to prevent the crisis, as they already took dramatic steps to deregulate the economy, privatize government monopolies, and reduce job security. Despite all of this, their competitiveness did not increase enough to address the trade deficit (1229-1230).
• The exception to this was in the public sector, which was inefficient and bloated in Greece, Portugal, and Spain. Greece represents a special case since multiple Greek governments took advantage of low interest rates to massively expand the public sector as a form of political patronage, generating massive debt and a horrible inefficient public sector (1230).
• Revelations about the scope of Greek debt led to a sovereign debt crisis in 2009, whereupon Greece was bailed-out by the EU and IMF in exchange for austere budget cuts. The collapse of an asset boom over the next year ripped through multiple European banking systems, forcing Ireland to accept European loans and austerity measures in 2010, followed by Portugal in May 2011, and Spain and Italy in 2012. The ECB's announcement in September 2012 that it would offer unlimited support to government bonds calmed the crisis, whose last outburst was a bailout of Cypriot banks, at heavy cost to depositors, in March 2013 (1230-1231).
• The austerity programs implemented in affected European countries were among the most severe in history, with Greece being forced to reduce its budget by 11% of GDP within 3 years, Ireland by 9% of GDP within 5 years, and Portugal by 6% of GDP within 3 years. The resulting recessions were all greater than the aftershock of the 1974 oil crisis (1231).
• The response to the Euro Crisis was a collective European response, with wealthier northern European countries bailing-out failing countries to the turn of hundreds of billions of euros, however, this response was slow, with the European Financial Stability Fund only being established in October 2011 and the European Stability Mechanism only in 2013. This delay meant that the costs of adjustment were placed primarily on southern European countries, who faced some of the greatest recessions and austerity measures in history (1231).
• Furthermore, most of the emergency funds supplied by northern European countries were actually used to bailout their own banks who had loaned money to southern Europe, with under a third of total bailout funds being allotted for public spending (1231).
• The Euro Crisis actually contained three distinct crisis: a crisis of confidence in sovereign debt markets, a general financial crisis caused by assets booms and excessive lending leading to the insolvency of a number of European banks, and a crisis of growth as austerity causes continued economic stagnation in southern Europe (1232).
• The ostensible solution to the crisis of growth is the 'fiscal compact' of March 2012 to require balanced budgets, and to demand structural reform through privatization and deregulation to increase competitiveness. Neither of these solutions is likely to work to restore southern European economies nor decrease unemployment. Even the IMF admits that economic growth and increased employment are possible only with the reduction of austerity, and budget deficits remain high as proportion of GDP because budget cuts cause such precipitous declines in GDP. The EU has stuck with this failed plan because it cannot agree on a new one (1234).
• A failure to address the growth crisis in southern Europe will result in a deflationary crisis similar in scope and cause to those experienced under the Gold Standard (1239).
• European countries have consistently failed to respond to the Euro Crisis as a collective problem, instead trying to foist the costs from themselves onto other member states. This explains why the response to the crisis has been so slow, as there have been fights every step of the way, with Germany, Netherlands, and Finland playing a particular role in limiting the role of the ECB (1233).
• This lack of unified response and the prioritization of national interests over the collective European interest is ultimately the greatest peril facing the EU, as the disproportionate allocation of costs has drastically reduced support for the EU and undermines the European project (1235-1236).
• The future response to the continuing Euro Crisis is likely to be half measures due to a lack of consensus. It is likely to include a writedown of Greek debt and a relaxation of austerity. There have also been mentions of 'more Europe' as a solution, although there is disagreement on what that would entail (1238); moreover, support for 'more Europe' of any kind is declining across Europe (1239).
• How the EU responds to the Euro Crisis will determine the future of the EU, whether it represents a European project that would necessitate northern European support for southern Europe, or whether it is a limited economic body that does not necessitate mutual support between member states (1239).
• The Euro Crisis has caused a massive division to emerge within the European financial system, similar to that which existed prior to the EMU, in which credit is widely available to northern Europe while credit is scarce and interest rates are high in southern Europe. This is also reflected in the economic recovery in northern Europe, whereas lack of credit and low spending has stalled the southern European economies (1232).
• The European states have generally not recognized that the scope of the debt crisis means that some creditors will not be repaid, nor have they come to a consensus about which creditors that will be. Bailouts in Greece and Cyprus have mainly punished bank depositors, although most debt restructuring plans in southern Europe are likely to be paid by tax payers through a devaluation of publicly-owned debt assets (1233).
• There are two potential solutions to the growth crisis: 
• Southern European countries leave the Eurozone and go back to other currencies that they can devalue. This solution is unpopular in Southern Europe because it would cause an immediately recession, likely triggering the collapse of financial institutions, and it would rob them of the prestige gained from Eurozone membership. Northern European countries dislike this plan because the euro exchange rate would appreciate, reducing the competitiveness of their exports, and the value of their loans to southern European countries would decline (1234).
• The EU could begin a general transfer program to invest northern European capital in competitive areas of southern European economies, thus generate growth. This would be beyond the current redistributional capacities of the EU. It is also unpopular with northern European countries as it might not work, as it is unclear how southern Europe could move up the value chain. Moreover, the creation of a government industrial policy is anathema to the free market principles upon which the EU was founded (1234-1235).
• The German response to the Euro Crisis has been heavily influenced by its own Freiburg School of economics that stresses monetary stability and limited intervention, and has been influenced by German political and economic experience. It thus blames the Euro Crisis on the profligate economic policy of southern Europe and sees budgetary rules as the solution (1236-1237).
• The French response to the Euro Crisis sees a much larger role for government intervention and economic planning, based on France's own experience of dirigiste industrialization in the 1950s and 1960s. Unlike the German prioritization of private sector initiatives, this view sees the state as the only guardian and advocate of the public interest. France has thus advocated for a more robust growth plan and a relaxation of austerity measures (1237-1238).
• The failure of the response to the Euro Crisis to proportionately distribute costs or to address the staggering rates of unemployment in some countries, often up 25% of the population, has turned the economic crisis into a political crisis. Economic crisis has precipitated the rise of anti-austerity and Eurosceptic parties (1238).