The European Financial Crisis: Potential Solutions and Consequences

Dr Heribert Dieter, German Institute for International and Security Affairs, Berlin

The financial crisis of some member countries of the Eurozone has exposed structural weaknesses. Member countries continue to be independent in their fiscal policy, provided they observe certain, defined restrictions. The crisis has exposed that fault line: Some countries, Greece in particular, were not observing the rules and were even blatantly cheating. Other economies, such as Spain and Ireland, implemented a prudent fiscal policy before the crisis, but the effect of a bursting bubble in real estate pushed both economies deep into fiscal deficits.

The potential consequences of the crisis are currently discussed along two trajectories. The first is the ‘Giant leap forward’ approach, in essence the creation of supranational structures in the Eurozone. The second is the ‘Back to responsible policy’ approach, which aims at strengthening the incentives that were part of the treaty of Maastricht at the national level. Whereas the former approach requires major legal and political change in Europe, the second approach could be implemented in a significantly shorter period of time. Given the increasing opposition, if not outright hostility, to the European integration process the ‘Back to responsible policy’ approach appears to be the only realistic option for the short- and medium term.

Dr Heribert Dieter has worked on a broad range of issues related to the development of the world economy. Specifically, he has written about regional integration in the Asia-Pacific, Africa and Central Asia as well as monetary regionalism. The international financial system has been another area of research. Since early 2010, he has contributed to the debate on the future of monetary and financial co-operation in the European Union. Dr Dieter studied political science and economics at the Free University of Berlin and at the Australian National University in Canberra. He holds a doctorate in economics and political science from the Free University Berlin, where he has been an adjunct professor since 2005. Since 2011, he has worked as Senior Fellow in the Research Unit Global Issues at the German Institute for International and Security Affairs in Berlin. Dr Dieter is also an Associate Fellow at the Centre for the Study of Globalisation and Regionalisation, University of Warwick.

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