The Eurozone’s ‘Winner-Take-All’ Political Economy: Institutional Choices, Policy Drift, and Diverging Patterns of Inequality

Matthijs, Matthias (2015) The Eurozone’s ‘Winner-Take-All’ Political Economy: Institutional Choices, Policy Drift, and Diverging Patterns of Inequality. [Conference Proceedings] (Submitted)

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Abstract

This paper offers an institutional explanation for the conflicting trends in inequality both across the Eurozone and within individual member states since the late 1990s. The paper argues that the introduction of the euro created different economic policy incentives for peripheral (or ‘mixed market economy,’ MME) and core (or ‘coordinated market economy,’ CME) member states. First, the euro’s institutional design was a political choice biased toward deflationary adjustment policies in times of crisis, disproportionately benefiting creditors and capital owners, and leading to falling incomes and higher unemployment in the periphery. Second, the institutional incentives of the Eurozone are the opposite for export-driven CMEs and demand-led MMEs during booms and downturns. A ‘winner-take-all, loser-pay-all’ outcome – where the Eurozone’s richer countries gained at the expense of the poorer ones, while at the same time widening domestic inequality in the periphery – was the result of political choices favoring capital over labor and creditors over debtors, made worse by economic policy drift at the European level, the lack of national democratic choice in the periphery, and the growing importance of organized financial interests in Brussels.

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