Predatory preferences and external anchors : The political sources of European imabalances.

The economic imbalances that caused the euro crisis are essentially political in nature as they result from both hard- and softcurrency countries seeking to avoid addressing fundamental policy inconsistencies. The hard-currency mercantilism of Germany and its smaller neighbours is inherently vulnerable to currency appreciation
and thus needs to lock its main trading partners into a fixed exchange rate in order to survive. The lack of an inclusionary post-war settlement meant that soft-currency countries were progressively unable to contain distributional conflicts without a fixed exchange rate anchor. As a result, wage costs came to diverge rapidly under the common currency thereby contributing to massive current account imbalances. Apart from the economic issue of whether balance should best be restored by internal or external devaluation, the more important question may be whether eurozone nations are politically able to implement regimes that depend neither on external anchors nor on mercantilist current account surpluses.

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