FES BRIEFING CRISIS AND REFORM OF THE EUROZONE How we can mend the North–South divide Andrea Boitani  /  Roberto Tamborini March 2020 There is now general agreement among international scholars, authorities and even political leaders that reforms of the euro­zone architecture are necessary, ideally aimed at fostering further integration on the grounds of(at least) economic policy and governance. This claim has been endorsed by the top European institutions, with the Juncker Commission tak­ing the lead of the reform agenda, and the new Commission approving some proposals. Behind this general plea for»more Europe«, however, diver­gences loom large. The cleavage is normally represented in geographical terms, with the Northern euro-zone countries on one side and the Southern euro-zone countries on the other. Our reflections»from the South« are in line with this approach, although it is clear that divergences have to do more with economics and politics than with geography. As a matter of fact, suspicion runs high and mutual trust runs low between southern and northern euro-zone countries. In these circumstances it is extremely difficult to reform the euro­zone rules and institutions, while the scene is set for populist, sovreignist and anti-European movements to thrive. The very existence of the euro zone and of the EU is in jeopardy. The aim of this paper is twofold. We attempt first to under­stand the crisis and its mismanagement by appealing to a»consensus view« that has progressively emerged, mainly around»mainstream« economic principles, which, admittedly, are not those referred to by»hardliners« in the northern or the southern euro-zone countries. This effort will help the reader to focus on why we disagree and to find out whether and how agreement can be reached. Second, we try to build on this common narrative in order to identify possible consensus changes to the euro-zone rules and institutions. While there is broad agreement on the ingredients of the crisis, the narrative prevailing in the northern euro-zone countries downplays the dimension of institutional mismanagement of the crisis to emphasise the responsibilities of individual coun­tries(notably the southern euro-zone countries, due to their fiscal indiscipline and loss of competitiveness), whereas the southern euro-zone countries predominantly put things the other way around. Our take from the consensus view is that the crisis originated in the United States and spread across the world, but that there was indeed a dramatic» European­ization« − mainly through private financial channels – that was exacerbated and prolonged by the interaction of the flaws inherent in euro-zone governance and structural factors in both the southern and the northern euro-zone countries. These factors specific to different countries also caused their different responses in the course of the crisis. Was the crisis mismanaged? Was mismanagement responsi­ble for deepening the crisis? Are there lessons to be learned? These questions, too, are a matter of disagreement between the southern and the northern euro-zone countries, whereas we highlight three points of convergence among international observers. Fiscal austerity was imposed too early, too much and uncoordinated. The result was a pro-cyclical and counter-productive fiscal consolidation that led to a second recession after 2011 and an increase in the debt-to-GDP ratio in those countries where austerity measures were most severe. The absence of common financial backstops paved the way to public involvement in the private turmoil, fears of the insolvency of highly indebted sovereigns, and the rise of redenomination risks. The ECB was left to fight the crisis alone, even though it is well known that monetary policy and fiscal policy should be coordinated. Consequently, while it is often said that the only way out of the present euro-zone maze is»more Europe«, there are two different»more Europe« reform models. One is the Maastricht 2.0 model, which seems more akin to the north­ern euro-zone countries, whereby the doctrine of exclusive national responsibility is reaffirmed, the Fiscal Compact is ele­vated to the rank of EU legislation and further sovereignty is devolved to supranational technocratic agencies with a clear mandate to enforce the rules vis-à-vis national governments. In this model, market discipline has a prominent role, while risk sharing is strictly subject to prior risk reduction on the part of financial institutions and sovereigns. Though seem­ingly reasonable, the two-stage strategy hinges on uncertain foundations. In fact, according to the classic theory of risk, the 1