The Aftermath of the Eurozone Crisis: Towards Fiscal Federalism?*

The Eurozone crisis, which followed in the wake of the global financial crisis, affected eurozone economies asymmetrically. The seeds of the asymmetric impact were inherent in the structure of Economic and Monetary Union (EMU), which called for a single monetary policy for all members of the club, despite wide-ranging macroeconomic divergence among them. The single monetary policy embodied a very low real interest rate for the peripheral economies in the years preceding the crisis, while the interest rate was de facto high for the northern economies. The challenges of developing a genuine single currency area – an ‘optimal currency area’ in the language of economists – were accentuated further by the absence of (direct) fiscal policy coordination and only minimal financial regulation (Copolevitch et al., 2016). Thus, the persistently low real interest rates set by the European Central Bank (ECB) in the years preceding the crisis had encouraged lax fiscal discipline in the periphery economies, a key reason for the explosion of budget deficit and public debt (Maddaloni and Peydro, 2011). The policy responses to high deficits and debt were determined by the EMU structure, leading to domestic or EU driven austerity policy, accompanied by