Summary

The Global Financial Crisis, which originated in the United States, developed into a sovereign debt crisis in Europe, particularly the Eurozone. The Eurozone crisis was driven mainly by divergence in macroeconomic structures, fiscal indiscipline, and financial integration with fragmented regulatory and supervisory governance arrangements. The crisis also exposed flaws in the institutional design of the Economic and Monetary Union (EMU). The EMU lacked mechanisms of effective crisis prevention and management and fiscal coordination, had a centralized monetary policy despite divergence in the macroeconomic structure and institutional setting across member states, and adopted a “light touch” approach to financial regulation. In response, crisis-hit countries implemented structural reforms and public spending cuts. European Union (EU) leaders attempted to address these deficiencies with institutional reforms at the national and regional level. Policy responses and institutional reforms have led to populist backlash with declining trust in regional and domestic politics and organizations, with voters favoring more inward-looking, nationalist political parties. Within this context, the Eurozone and EU face further challenges to maintain macroeconomic and financial stability and to ensure intraregional policy coordination.