Tough Love: The True Nature of the Eurozone Crisis

There are a number of misconceptions about the ongoing Eurozone crisis. One is that it is a debt crisis: in fact many countries that are considered to be reasonably sound have bigger long-term fiscal deficit problems than even the weakest Eurozone countries. The crisis partly reflects the pain of frontloaded fiscal repair. But even more so, the crisis has turned into a step-by-step attempt to forge a stronger and more coherent Europe. The reluctance of the European Central Bank to defuse the tensions which this process creates makes the region vulnerable to bouts of market turmoil. This paper outlines the course of the crisis, the policy responses to date, and the actions that are necessary to resolve it.