ABSTRACT
This chapter examines the establishment of an international treaty outside the structure of the EU that imposes obligations on EU member states, forces a reshaping of the Eurozone’s rules and policy architecture, and does so at the initiation and ultimately discretion of one state: Germany. Europe’s sovereign debt crisis, at least in the southern periphery of the Eurozone, underlined the inherent weaknesses of a monetary union without a fiscal union – that is, without automatic transfers between the member states of the union. As early as 1994, an American analysis of EMU underlined that as the membership became more diverse, fiscal transfers would be necessary to even out disparities across regions and moderate cyclical highs and lows in the Eurozone economy (Eichengreen & Frieden 1994; Hagen & Eichengreen 1996; Bayoumi & Masson 1995). Without the moderating effect of such transfers, and in the absence of an optimal currency area in which all countries were highly alike, periodic strains on the national economies within the Eurozone would naturally lead to suboptimal policies over an extended period, as well as political tensions between countries over growth, employment and stability levels that could tear the Eurozone apart (Eichengreen 1997). Either countries with low inflation rates would find themselves permanently disadvantaged by interest rates that were too high for their economies, or countries with high inflation rates would find themselves in a boom-bust cycle in which interest rates were too low, provoking economic bubbles that would burst with catastrophic consequences.
