EU policies

Giancarlo Corsetti, 07 September 2015

At the birth of the euro, the fiscal, financial, and monetary institutions in Europe were not sufficiently developed. This chapter describes these inefficiencies and the role they played in the Eurozone crisis. Instability in the Eurozone grew out of a disruptive deadlock between national governments forced to address and correct fundamental weaknesses in their national economies on their own, and the EZ-level policymaking. The future of the Eurozone therefore rests on developing an institutional framework that can credibly deliver stability at the EZ level.

Daniel Gros, 07 September 2015

The Eurozone crisis started as a sudden stop to cross-border capital inflows. This chapter suggests that countries with current-account surpluses did not endure lasting financial stress. The balance of payments crisis then became a public debt crisis, where the public debt which mattered was that owed to foreigners. Overall, the crisis proved much more difficult to deal with given the predominance of bank financing, thinly capitalised banks, the absence of a common mechanism to deal with failing banks, and the absence of a common lender of last resort.

Lars P Feld, Christoph M Schmidt, Isabel Schnabel, Volker Wieland, 07 September 2015

The Eurozone is weak. This column presents an analysis of its two prime weaknesses – the lack of economic and fiscal policy discipline leading to the build-up of huge public and private debt levels and a loss of competitiveness, and the lack of credible mechanisms for crisis response that would reign in moral hazard problems and establish market discipline. Completing the currency union’s architecture and achieving credibility for its rules are key, given the heterogeneity and rigidity of its member countries' economies.

Agnès Benassy-Quéré, 07 September 2015

The problems in the Eurozone are not a side effect of the Global Crisis but rather date back to the Maastricht treaty. This chapter proposes a few possible remedies. First, it is necessary to make debt restructuring possible within the Eurozone. In particular, the risk loop between sovereigns and banks needs to be stopped through more diversified balance sheets. The second suggestion involves more shared sovereignty, not only for debtor countries, but also for creditors. At a minimum, the Eurozone needs a fiscal backstop for its banking union.

Jeffrey Frankel, 07 September 2015

No-one is optimistic about the Eurozone’s prospects. This column highlights the major causes of the Eurozone crisis, highlighting that many US economists thought the euro a bad idea from the outset. Previous emerging market crises have important lessons for Europe – if Alexis Tsipras were able to shift gears in the way that Kim dae Jung did in Korea and Lula did in Brazil, he would better serve his country.

Other Recent Articles: