Narrative 1: Economic Perspective
In discussing the sovereign debt crisis and the factors that led to it, many economists
argue that the current crisis has its origins in the founding period of the Economic Monetary
Union and the design flaws inherent in the European monetary system. Because the Member
States involved in the eurozone have vastly different fiscal and economic policies, they do not
comprise what economists call an Optimal Currency Area (OCA). Therefore, today’s crisis was
predictable. In a free market, booms and busts are inherent. When prices and wages rise during a
boom, a country needs flexibility to bring prices and wages back down to get back in sync with
its trading partners. Normally, countries with sovereign monetary policies can simply print more
money and devalue their currency – “reduce its value in terms of other currencies – and you
would effect a de facto wage cut” (Krugman 2011). Otherwise, it is necessary to have fiscal
integration, labor mobility and wage lowering – but politicians are loathe to promote a wage cut
within their constituencies for political reasons. As Paul Krugman states:
“Europe isn’t fiscally integrated: German taxpayers don’t automatically pick up part of
the tab for Greek pensions or Irish bailouts. And while Europeans have the legal right to