Crisis Cycle: Challenges, Evolution, and Future of the Euro

by John H. Cochrane, Luis Garicano, Klaus Masuch

How the euro survived a series of crises, and how to make it more resilient

The euro has survived crises unimagined at its the financial meltdown of 2007–2009, the sovereign debt crisis of 2010–2012, the pandemic, and the Russian invasion of Ukraine. The European Central Bank fought these crises with dramatic policy innovations, buying up vast amounts of debt and providing large loans to banks. But now everyone expects the ECB to intervene routinely, and the euro is more fragile as a result. Crisis Cycle recounts this history and offers recommendations for restoring a durable monetary union.

Monetary and fiscal policy are intertwined, especially in a currency union like the eurozone. Member states can be tempted to borrow and spend too much, and then count on the ECB to rescue them by printing money to buy their bonds. To avoid these disincentives, the ECB was founded with a narrow use interest rates to pursue price stability, and don’t buy sovereign debt. Debt and deficit rules would keep countries from getting into trouble.

The ECB’s emergency innovations brought back these disincentives. How can the EU avoid larger and larger bailouts? The authors argue that Europe needs a joint fiscal institution that can provide temporary help to sovereigns, a resolution mechanism so sovereign default is a motivating possibility, and bank reform that ensures sovereign default will not bring down the financial system. This timely book shows how to restore the euro’s ambitious and effective founding framework. The unique group of authors combine extensive policy experience and authoritative academic credentials.

Genres: Economics, Politics, Nonfiction

318 pages, Kindle Edition

Published June 17, 2025

Reviews

[Jakob · Rating 4 out of 5]

Read the most of the key chapters. Cochrane et al. provide most up to date analyses of the EMU’s history and ECB’s consequent expansion of action in response to past crises. They highlight the issue of mandate legitimacy, perception and conflation of economic and political governance in the Euro-Area and how there is a paradigm shift especially regarding inflation with in the western central banker hemisphere. At core drawing lessons from past adaptations they make key technical proposals to ensure adequate response for future crises.

[Thomas Romano · Rating 4 out of 5]

Interesting economic analysis of some of the issues around the newest monetary policy tools of the ECB. Fundamentally, the ECB has been forced to intervene with looser and looser tools as no other institution could have done so. However, this has destroyed any potential incentive for Governments to address debt burdens, as it is assumed the ECB will intervene.
The authors propose an interesting set of solutions. Including the creation of a new European fiscal institution to deal with sovereign crises capable of issuing european debt.
Unfortunately, they don’t have any suggestion as to how Southern European governments will be convinced such an institution should be created, nor how Northern European governments will be convinced such an institution should be financed.
As highlighted by the authors, similar political deadlocks are likely to make past temporary measures, permanent monetary tools.

[Diego Ferreras · Rating 4 out of 5]

Thought-provoking work on the evolution of the single European currency project in its first quarter-century of existence. The authors cover in detail the origin of the current institutional setup, as the original framework (designed to handle monetary-fiscal interactions in a currency union without fiscal risk-sharing) was modified in reaction to the various crisis (GFC, sovereign debt crisis, Covid). The crux of their argument is that the moral-hazard-limiting features of the original architecture have broken down, and that reform is needed to avoid a larger crisis in the future. Essential reading for anyone interested in the future of the euro.

[Kathy McMullan · Rating 5 out of 5]

I don't know if this was a silly read to learn more about the Euro and debt but was really useful and interesting to learn about how debt in the euro area. I might need to read again