The debt crisis that struck Europe’s Economic and Monetary Union (EMU) in the spring of 2010 has been both overdetermined and often deliberately misunderstood by scholars and policymakers alike. What began as a manageable fiscal problem in Greece soon morphed into a full-blown sovereign debt crisis of the Eurozone periphery. Indeed, the future of the euro itself was put in doubt. While the causes of the run on Greek bond markets in 2010 were undeniably of a budgetary nature—the inevitable outcome of years of excessive public spending and a deficient system of tax collection—the contagion to Ireland and Portugal, and then to Italy and Spain, was less obviously the result of fiscal profligacy on the part of those countries. Scholars have advanced multiple competing explanations for the crisis, many of them focused on the unsustainability of the buildup of intra-EMU macroeconomic imbalances during the economic boom years from 2003 to 2008. The main question, therefore, is what caused those balance-of-payments crises in the euro periphery in the first place? Were they the foreseeable result of the behavior of the individual member states, or were they the result of largely systemic forces deriving from an institutional design flaw in the single currency?

In From Convergence to Crisis, Alison Johnston manages to synthesize both strands of literature and advances the thesis that a “lack of competitiveness” on the part of the periphery was not just built into the euro’s design but was gradually made worse by rational decisions taken in the individual countries within their national institutional contexts. Johnston identifies the systematic divergence in the evolution of unit labor costs between the Eurozone’s northern “coordinated market economies” (CMEs) and southern “mixed market economies” (MMEs) in the run-up to the crisis as the main cause of the periphery’s large current account deficits. In her brilliantly argued and meticulously researched book, Johnston offers a rational institutionalist account of how the EMU went from an initial period of economic and financial convergence in the 1990s to a growing divergence in the 2000s, eventually triggering a continent-wide crisis of sovereign debt. For the author, the North’s advantage vis-à-vis the South lay in its corporatist wage-setting institutions and highly coordinated collective-bargaining mechanisms that allowed countries like Germany, Austria, and the Netherlands to systematically outperform their southern partners like Greece, Italy, and Spain in achieving lower levels of inflation. Lacking similar corporatist arrangements, and with domestic levels of inflation no longer checked by national central banks after the European Central Bank took over monetary policy for the Eurozone as a whole, the euro periphery gradually lost competitiveness and found itself with growing current account deficits. It was, therefore, only a matter of time before the bond market vigilantes judged those external imbalances to be unsustainable, and for a crisis to ensue.

In order to make her case, Johnston relies on a mixed-methods approach. Sound and robust econometric tests are enriched with multiple qualitative case studies—of Denmark and the Netherlands, Germany and Italy, as well as Ireland and Spain. She marshals a vast amount of evidence and data to bolster her central argument, which results in an innovative account of the way in which the Eurozone got itself into its sovereign debt mess. She also suggests that rather than focusing on European Union budgetary monitoring mechanisms—six-packs, two-packs, and fiscal compacts—EU officials in Brussels should turn their collective energy toward supranational wage setting. This is especially true for wage setting in the sheltered services sector that is mostly nontradable, rather than focusing chiefly on so-called structural reforms that mainly lead to wage suppression in the tradable manufacturing industry.

From Convergence to Crisis is bound to become required reading for anyone interested in understanding the causes of (and potential solutions to) the Eurozone’s seemingly never-ending crisis. Johnston’s mixed-methods approach shows, once again, why books are and should be very much alive in the field of international political economy, even though the pressure toward publishing articles in high-impact journals (with their unforgivingly strict word limits) has only increased over the past decade.

This book, and the author’s overall argument, will not be without its critics, however. While there is great merit to Johnston’s version of events—she masterfully describes the mechanisms behind economic and labor market convergence in the 1990s and divergence in the 2000s—her account is somewhat less convincing as an actual causal explanation of the euro crisis. As Erik Jones has forcefully argued, the sovereign debt crisis did not stem so much from a loss of competitiveness in the southern periphery as it did from massive capital inflows in search of higher yields coming mostly from northern Europe starting in the mid-1990s, that is, well before the euro had actually been introduced (see Erik Jones, “Competitiveness and the European Financial Crisis,” in James A. Caporaso and Martin Rhodes, eds., The Political and Economic Dynamics of the Eurozone Crisis, 2016). While pressures on unit labor costs in the North were indeed mitigated by strong corporatist institutions that were nonexistent in the South, historically low interest rates meant that southern European countries could easily finance their current account deficits. The problem therefore lay not with the current account but with the financial account, where the euro periphery built up large surpluses. A sudden stop to capital flows from North to South, which is exactly what happened during the Greek spring of 2010, was enough to bring the machine to a halt.

Jones underscores the often-forgotten observation that Greece actually gained in manufacturing employment during the pre-2008 boom, while Germany was systematically shedding manufacturing jobs. Furthermore, if the tradable manufacturing sectors in the periphery were much less affected by wage inflation than the nontradable services sectors during the boom years, how and why would periphery countries have lost a significant share in their export markets? What ended up triggering the euro crisis was a missing financial union (with joint banking supervision and resolution powers) and the stubborn refusal of Germany to embrace a common debt instrument (a safe asset that could have averted a liquidity crisis during the flight to safety). This meant that in a moment of financial market panic, capital would quickly flow out of the periphery and could only be replaced by emergency lending assistance of the ECB, which was itself subject to very strict ordoliberal rules. Finally, the lack of a common economic government and a legitimizing political union made the euro crisis into a more chronic crisis of EU governance (see Matthias Matthijs and Mark Blyth, eds., The Future of the Euro, 2016).

Where Johnston’s account is more convincing is in explaining the painful years of postcrisis asymmetrical adjustment, where the North flourished while the South remained mired in recession and stagnation. The EU policy response in the periphery wrongly focused on fiscal austerity and structural reforms to improve competitiveness. The fact that the MMEs of the southern periphery saw a collapse in demand caused by budgetary austerity measures and across-the-board wage cuts meant that their growth model was no longer compatible with Eurozone membership. The export-driven growth models of northern CMEs benefited both from a weaker euro and corporatist arrangements to keep wage growth in line with productivity. The result has been widening standards of living between the North and South, making a mockery out of the EU’s lofty ideal of “ever closer union.”