Paved with Good Intentions: Global Financial Integration, the Eurozone, and the Imaginary Road to the Fabled Gold Standard

Regional systems of governance may resolve some of the dilemmas of global financial integration, and the eurozone is among the most advanced examples of attempts to do so. This paper argues that the recent Euroland sovereign debt crisis is a test of this proposition, and the outcome leaves the EU found wanting. The first section of this paper places EMU in the broader context of financial liberalisation and the crisis of 2007-09. The second section demonstrates that there were plenty of warnings in the pre-crisis theoretical and empirical literature in economics and policy studies that financial instability could be closely associated with financial liberalisation, and that robust mechanisms of governance were required to deal with this eventuality. A third section examines the crisis in the Eurozone and the reaction to it in the light of this literature, demonstrating that the lessons available pre-crisis remain poorly learned. The financial market phase of the crisis showed the EU and ECB as capable of leadership and innovation in crisis management. The sovereign debt phase was less successfully managed, with domestic political dynamics stimulating centrifugal tendencies among eurozone members claiming to be committed to an ‘ever closer union’. The reforms so far proposed offer little in terms of optimism. The EU appears to be looking for a functional equivalent of the lost, mythical Gold Standard: if only the rules are the right ones, and everyone behaves properly, stability will be achieved automatically. Such an outcome is unlikely, and the eurozone hangs in the balance as a result of serious policy mistakes.