The Political Economy of the Euro

The Eurozone's present state of crisis originated from decisions made at its creation. The decision to create a monetary union was motivated by political objectives and completely disregarded the economics of a monetary union. Political leaders did not understand the necessary economic conditions for a successful monetary union and did not recognize the inherent fragility of the monetary union they established. They showed the same disturbing lack of understanding of the economics of the sovereign debt crisis in 2010. They misdiagnosed the problem, and their response included disastrous decisions that intensified the crisis. This review explains these errors and concludes with recommendations for saving the euro.