Introduction

It was only during 2011 that the possibility of some form of break-up of the Economic and Monetary Union (hereafter EMU, and alternatively referred to as the euro area or euro zone) with one or more members leaving, especially Greece, became a matter of serious political debate. Although some analysts and commentators had from the outset expressed doubts on the long-term sustainability of a currency union, which was not based on political union, or indeed economic integration, the experience of the first decade or so appeared to indicate that there was no cause for concern over the long-term future of the euro (see, however, Arestis and Sawyer, 2003a, 2006a, 2006c, 2012a). But, as will be argued below, problems were bubbling under the surface, which were placing strains on the monetary union; these came to the fore as the ‘great recession’ unfolded, and became clearly obvious as the euro crisis emerged (Arestis and Sawyer, 2012a). The economic performance of the euro area as a whole had, since its formation, been relatively weak (as evidenced below) but not disastrously so, and indeed some of the smaller economies had experienced faster growth (than before the formation of the euro). Inflation and nominal interest rates were lower in many countries as compared with previous experience. There were signs of emerging problems given the persistence of inflationary differentials between member countries, leaving some, notably the southern European countries, in situations of deteriorating competitiveness. The current account imbalances between countries were tending to grow, with substantial capital flows from the surplus countries (mainly northern European, and Germany in particular) to deficit countries (mainly southern European, with Greece and Portugal most seriously affected), and the associated build-up of debts.