Future-Proofing the Euro

Source details

Title reviewed: Crisis Cycle: Challenges, Evolution, and Future of the Euro.
Authors of the book: John H. Cochrane, Luis Garicano, and Klaus Masuch.
Publication details: Princeton University Press, Princeton, NJ, 2025, 328 pp., $35.
Review author: VOLKER WIELAND.
Central claim: The euro’s current institutional evolution—characterized by incremental changes after each crisis—has produced larger and less constrained monetary and fiscal interventions and risks even worse future crises.
Historical context noted: The euro was introduced more than 25 years ago and has survived multiple crises, including the global financial crisis, the euro debt crisis, and the 2010 Greek adjustment program.

Institutional weaknesses highlighted:
- A currency union without fiscal union leaves overindebted countries that must be allowed to default like companies.
- If the central bank consistently prevents default or rising bond yields, countries lose incentives for fiscal responsibility.
- Frequent interventions by monetary authorities lead to recurrent inflation and weaker incentives for sound fiscal policy.
Institutional evolution summarized:
- The book covers the initial design of the European Economic and Monetary Union and subsequent episodes: the global financial crisis, the euro debt crisis, institutional reforms, zero interest rates with asset purchases and subsidized loans, and the policy response to the pandemic and subsequent inflation surge and decline.
Authors’ perspective on original design: The euro’s founders recognized the importance of incentives for responsible macroeconomic policymaking, but the initial design was incomplete.

Overarching recommendation: Implement a package of reforms sooner rather than later, and preferably in calm times—not amid the next crisis.
Specific proposals summarized:
- Release the ECB from the problems surrounding sovereign debt by stopping interventions in national sovereign debt markets.
- Establish a framework for orderly sovereign default and debt restructuring to be applied as soon as sovereign problems arise.
- Implement regulation to reduce banks’ exposure to sovereign debt and sovereigns’ exposure to banks.
- Strengthen European fiscal and political institutions to provide temporary financial and balance of payments support in a crisis, even to the largest euro area economies, but subject to strict conditions to achieve fiscal and microeconomic reform.
- Revitalize and strengthen the European Stability Mechanism as a potential vehicle for crisis support.
- Increase the supply of truly European sovereign debt.
- Favor long-term national sovereign debt over short-term sovereign debt.

Style: The reviewed book is presented as accessible, not a dense equation-filled treatise, with an easy-to-read conversational style aimed at readers interested in economic and political drivers of institutional change.
Intended timing: The authors urge action now to “future-proof the euro” rather than waiting for the next crisis to force reforms.

Volker Wieland, F&D Magazine, June 2025.

Future-Proofing the Euro
- Future-Proofing the Euro (Markdown version)
- Future-Proofing the Euro (PDF)