Euro Area Reform
Debate Moderator(s): Jean Pisani-Ferry, Jeromin Zettelmeyer
Policy Insight 91: Reconciling risk sharing with market discipline: A constructive approach to euro area reform
Related Content:
- Vox Column: How to reconcile risk sharing and market discipline in the euro area
- VoxTalk: Reconciliation and reform: Risk-sharing and market discipline in the Euro Area
- Vox Column: Panic-driven austerity in the Eurozone and its implications
Some reactions to the report, and independent contributions that have already been published by leading economists:
A Franco-German consensus on the euro?
By Martin Sandbu, 17 January 2018 in the Financial Times
Sandbu writes: “a group of 14 French and German economists, many of the best policy-oriented thinkers of both countries … have come together to create a consensus road map on eurozone reforms … Decision makers in all eurozone countries should place this contribution prominently on their policy drawing boards.” Read the full article here: (https://www.ft.com/content/51e75114-fb63-11e7-9b32-d7d59aace167)
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Commentaries
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Jakob Vestergaard, 16 July 2018
Lead Commentaries
A European fiscal capacity can avoid permanent transfers and improve stabilisation
Calls to complement national automatic stabilisers and the ongoing financial integration in the euro area with a common fiscal instrument have provoked a mixed response. This column, part of the VoxEU debate on euro area reform, uses a dynamic stochastic general equilibrium model of the euro area to show that fiscal risk sharing brings an additional layer of stabilisation compared to national stabilisers, particularly when monetary policy is constrained by the effective lower bound. It also argues that an unemployment reinsurance scheme could be designed in such a way that it would benefit all members of the currency area and would not lead to permanent transfers among countries.
A more stable EMU does not require a central fiscal capacity
A central fiscal capacity is a recurring topic in discussions on reform of the Economic and Monetary Union, but no consensus on the usefulness and necessity of a such a capacity has been reached. This column, part of the Vox debate on euro area reform, argues that the potential stability benefits of a central fiscal capacity can be achieved through stronger financial market risk sharing and more effective use of fiscal stabilisers, without any additional fiscal risk sharing.
Reforming the EU fiscal framework: A proposal by the European Fiscal Board
Reforming the EU’s rules is particularly important at the present juncture – governments must take advantage of the current environment to prepare for the next crisis. This column, part of the Vox debate on euro area reform, outlines the European Fiscal Board’s proposals for a major overhaul of the EU fiscal framework, which it argues would result in a simpler and more transparent framework thanks to the use of a single budgetary anchor and a single observable operational target.
Fixing the euro needs to go beyond economics
The agenda to fix the euro is hampered by conflicting national interests. Creditor countries demand fiscal house cleaning and debtor countries ask for risk sharing. There is currently a political deadlock about how the adjustment burden should be distributed, perpetuating a state of vulnerability that is not in the collective interest of euro area members. This column, part of the Vox debate on euro area reform, argues that overcoming this coordination failure requires reforming the political governance of the EU, rather than just its economic governance.
Increasing the effectiveness and ownership of European fiscal rules
European fiscal rules have become overly complex over time. Some consider them too lax to ensure fiscal sustainability, while others see them as too rigid to ensure adequate smoothing of economic activity in bad times. This column, part of the Vox debate on euro area reform, argues that to make the rules more effective, they should be simplified and focus on expenditure growth, while avoiding reliance on unobservable concepts such as structural fiscal balances. Increased ownership requires more flexibility and built-in positive incentives, such as allowing deviations when financed with GDP-linked bonds, which would also improve fiscal sustainability.
Turning national growth-indexed bonds into European assets
The idea of growth-indexed bonds has recently regained momentum in policy circles, but research has shown they are unlikely to substantially decrease the risk of a debt explosion in advanced economies if not issued through a large and coordinated mechanism. This column, part of the VoxEU debate on euro area reform, proposes such a mechanism for the euro area – a European Debt Agency issuing securitised safe and risky European bonds backed by country-specific growth-indexed bonds.
Euro area reform: An anatomy of the debate
A year ago, a group of 14 French and German economists joined forces with the aim of forging common proposals for euro area reforms. Their report gave rise to a lively discussion among officials and academics. This column summarises the group's proposals and also addresses some of the points raised in a subsequent Vox debate on the topic.
‘Black zero’ in disguise
Two proposals for reforming the euro area’s fiscal framework were published on Vox yesterday. This column describes how, in essence, the proposal from the French economists is based on discretionary policy decisions while their German counterparts propose a largely rules-based approach. It also argues that with its assumption that the medium-term goals of fiscal policy cannot be determined by simple formulas, the French proposal is closer to the status quo than the German concept and has a greater likelihood of resulting in good fiscal policy.
Refocusing the European fiscal framework
Simplicity and transparency are essential to strengthen the effectiveness of fiscal rules and to ensure sustainable public finances; thus the German Council of Economic Experts has criticised recent reforms of the European fiscal framework for exacerbating their complexity. This column proposes a redesign of the existing fiscal framework together with a drastic reduction in exception and escape clauses. The reformed framework employs a modified expenditure benchmark as an annual operational target. In addition, it implements the structural deficit rule as its medium-term target through a multi-purpose adjustment account, and a pre-specified debt ratio as its long-term limit achieved with a debt-correction factor.
The economic case for an expenditure rule in Europe
Proposals for reforming the euro area back on the agenda. An overhaul of the European fiscal rules should be on high on this agenda, because the current fiscal framework has not worked well. This column proposes substituting the numerous and complex present rules with a new, simple rule focused on limiting annual growth rate of expenditures.
Could the 7+7 report’s proposals destabilise the euro? A response to Guido Tabellini
The proposed package of reforms from the team of French and German economists aimed at increasing the stability of the euro area has sparked a lively debate on Vox. In this column, two of the paper’s authors respond to some of the criticisms of their proposals, focusing on the broad issues of debt restructuring as ‘ultima ratio’ and regulating banks’ sovereign exposures.
Whither a fiscal capacity in EMU
In their CEPR Policy Insight, the team of French and German economists focus on a compromise between market discipline and risk sharing. This column, part of the VoxEU debate on euro area reform, argues that their proposal fails to address legacy debt problems convincingly and that the introduction of a fiscal capacity would repeat the mistakes made at the introduction of EMU, with later steps towards European integration being attempted before the necessary first steps have been taken.
Delivering a safe asset for the euro area
The euro area debt crisis saw the region ravaged by multiple sovereign bond doom loops and has inspired several proposals for a single safe asset for the region. While a lack of political consensus has proven the main obstacle to date, technical issues relating to the complexity of splitting the existing sovereign debt stock and concerns on contagion amongst senior and junior debt structures also weigh in. This column, part of the VoxEU debate on euro area reform, illustrates how a 20-year Purple bond transition could address these issues and offer a path to genuine Eurobonds.
Risk sharing and market discipline: Finding the right mix
A key question in the debate on the reform of the euro area concerns the right mix between risk sharing and market discipline. This column, part of the VoxEU debate on the topic, argues that proposals to enhance market discipline in the euro area are counter-productive, because they increase the vulnerabilities of countries with high legacy debts.
Next steps after the Euro Summit
EU leaders addressed euro area reform at the Euro Summit on 29 June. In this column, which we add to the VoxEU debate on euro area reform, the group of 14 French and German economists behind the recent CEPR Policy Insight on the topic argue that the summit statement represents a constructive first step and crosses red lines that were considered taboos only a few months ago. However, the summit’s commitments still fall short of a comprehensive package.
A ‘what if’ approach to assessing proposals for euro area reform
The policy discussion on euro area reform has entered a critical phase. This column, part of the VoxEU debate on euro area reform, attempts a ‘what if’ experiment based on the proposals in the recent CEPR Policy Insight. Focusing on the Greek case, it looks at the counterfactual case of such proposals having already been implemented at the outset of the crisis and examines their potential role in preventing the outbreak of the crisis or mitigating it once it was underway.
Euro area reform cannot ignore the monetary realm
The authors of the recent CEPR Policy Insight argue that the euro area needs an alternative to the current system of fiscal rules and financial penalties to discipline fiscally wayward members. This column, part of the VoxEU debate on euro area reform, argues that by not complementing their proposals with recommendations in the monetary realm, the authors have missed an opportunity to provide a balanced reform package that would not only increase fiscal discipline and risk sharing, but also enhance liquidity provision.
Beyond risk sharing and risk reduction
Deepening of EMU cannot wait until all countries have carried out all their domestic reforms, both risk sharing and risk reduction need to proceed simultaneously. In fact, all euro area countries are exposed to the risk of an incomplete monetary and economic union but with very asymmetric costs. This column, part of the VoxEU debate on euro area reform, argues that this risk can only be tackled with common instruments and policies at the European level, whose mere existence will reduce not only its magnitude but also its asymmetric consequences.
Beyond ESBies: safety without tranching
The euro area lacks a common safe asset, leaving banks to rely on bonds issued by their own countries and thus magnifying fiscal crises and contributing to financial fragmentation. To address this problem, an influential proposal advocates sovereign-bond backed securities, the most senior of which would play the role of safe asset. This column, which introduces a new CEPR Policy Insight, investigates whether criticism of the proposal’s reliance on securitisation is justified and compares it with alternatives that would not require tranching.
Make euro area sovereign bonds safe again
In their recent Policy Insight, the team of French and German authors suggest introducing sovereign bond-backed securities to play the role of safe asset in the euro area. This column, part of the VoxEU debate on euro area reform, argues that an improved euro area architecture would, in the long run, make all euro area sovereign bonds safer, and thus make the provision of safe assets through untested and potentially disruptive sovereign bond-backed securities unnecessary.
A plan to save the euro
For the euro area to be stable and move forward productively, substantial improvements in its operation are required. This column, part of the VoxEU Euro Area Reform debate, argues that the proposals in the recent CEPR Policy Insight are necessary if the euro area is to avoid another catastrophic crisis and that they would go a long way towards addressing the legitimate concerns of citizens in both the core and periphery of the euro area.
Fiscal rules and the role of the Commission
The proposals on fiscal frameworks and rules in the recent CEPR Policy Insight on euro area reform showcase the multiple dimensions of the fundamental dilemmas we are confronted with in the governance of the euro area. This column, part of the VoxEU debate on Euro Area Reform, looks at the challenges to the central role of the Commission that have arisen as the rules-based fiscal framework has been severely compromised.
Completing Europe’s Banking Union means breaking the bank-sovereign vicious circle
Several euro area leaders have recently referred to the need to "complete the Banking Union". This column, part of VoxEU's Euro Area Reform debate, asks what would be required for Banking Union to be considered "complete", and makes the case for a modest approach to breaking the vicious circle between banks and sovereigns.
Euro area reform: No deal is better than a bad deal
The recent proposals for euro area reform from a team of French and German economists have initiated an intensive debate. This column, part of VoxEU's Euro Area Reform debate, argues that the specific insolvency risk of euro area membership is the main risk that should be covered by joint risk sharing, and that the modest proposals for public and private risk sharing are insufficient in this regard.
Risk reduction and risk sharing in the EU: The role of better fiscal rules
The key question in the policy debate on the next steps for the Economic and Monetary Union seems to be whether we can progress with integration in a context where some countries perceive themselves as consistently paying for policy mistakes of others, while others see themselves victims of a moral diktat. This column, adding to VoxEU's Euro Area Reform debate, argues that the policy dilemma around a central fiscal capacity can only be overcome if fiscal risk sharing and risk reduction advance in parallel. Therefore, reform of EU fiscal rules need to receive more attention.
Refocusing the debate on risk sharing under a European Deposit Insurance Scheme
Recent months have seen many proposals for alternative designs for a European Deposit Insurance Scheme that would cater for concerns that such a scheme would lead to some banking sectors having to bear the costs of bank failures in other member states. This column, adding to VoxEU's Euro Area Reform debate, asks whether these concerns are well founded.
Europe needs a broader discussion of its future
When thinking about what will determine the prosperity and well-being of citizens living in the euro area, five issues are central. This column, part of VoxEU's Euro Area Reform debate, argues that the important CEPR Policy Insight by a team of French and German economists makes an important contribution to two of them, but leaves aside some of the most crucial ones: European public goods, a proper fiscal stance and major national reforms. It also argues that its compromise on sovereign debt appears unbalanced.
Deepening EMU requires a coherent and well-sequenced package
The debate on deepening EMU is entering a critical stage. This column, contributing to VoxEU's Euro Area Reform debate argues that while the proposals in a recent CEPR Policy Insight are both timely and attractive, the mix seems unbalanced and carries significant risks. The focus of the proposals on reducing fiscal risks could lead to financial distress, ultimately requiring more, not fewer, rescues.
Analysis of the proposal “A constructive approach to euro area reform”
There is currently both an economic and a political window of opportunity for reform in the euro area. This column, which forms part of VoxEU's Euro Area Reform debate, discusses the strengths and weaknesses of the proposals in the recent CEPR Policy Insight and makes recommendations for extensions and alternatives.
The role of the ECB in the reform proposals in CEPR Policy Insight 91
One criticism of the recent CEPR Policy Insight on euro area reform is its supposed silence on the role of the ECB. In this column, which we add to VoxEU's Euro Area Reform debate, two of the authors of the Policy Insight argue that the reforms proposed in it actually have significant implications for the ECB’s role, in a way that would make it easier for the ECB to fulfill its mandate.
Building a stable European Deposit Insurance Scheme
Deposit insurance, like any insurance scheme, raises moral hazard concerns. Such concerns arising from European deposit insurance can be alleviated through a country-specific component in the risk-based premium for deposit insurance and limits on sovereign bond exposures on bank balance sheets. This column, which forms part of VoxEU's Euro Area Reform debate, argues, however, that proposals to maintain national compartments in a new European Deposit Insurance Scheme are self-defeating, as such compartments can be destabilising in times of crisis.
EMU: Liquidity of solvent member states more important than fiscal stabilisation
The smooth functioning of the EMU requires risk sharing. This column, which joins VoxEU's Euro Area Reform debate, argues, however, that its best use is not in the support of fiscal expansion in recession countries, but in ensuring the liquidity of solvent sovereigns under market pressure. Giving the ESM/EMF access to central bank financing should be explored as a means to facilitate it.
Blind spots and unintended consequences of the 14 economists’ Policy Insight
The recently published CEPR Policy Insight by a team of French and German economists proposes a package of reforms to make progress on risk sharing and risk reduction in the euro area. This column, which forms part of VoxEU's Euro Area Reform debate, argues that while many of the package’s elements make sense, it leaves too many questions open and fails to address a number of central problems of EMU architecture.
A stronger euro area through stronger institutions
A team of French and German economists recently proposed on this site a series of reforms to strengthen the euro area's institutional framework. This column, which joins VoxEU's Euro Area Reform debate, argues that while the proposals form a useful basis for discussion, they are nevertheless subject to important shortcomings.
Breaking the stalemate on European deposit insurance
Many EU-level reports have highlighted a European Deposit Insurance Scheme as a necessary component of banking union, but none of these options has met sufficient consensus among euro area countries. The authors of this column, which joins VoxEU's Euro Area Reform debate, propose to end the deadlock with a design that is institutionally integrated but financed in a way that is differentiated across countries.
The crux of disagreement on euro area reform
A recent report by a group of French and German economists proposed a set of reforms to improve euro area’s financial stability, political cohesion, and potential for delivering prosperity to its citizens. This column, which joins VoxEU's Euro Area Reform debate, discusses some specific aspects of the proposals that in the author’s view deserve further clarification, and considers the overall implications of the proposals for financial stability of the euro area.
How to reconcile risk sharing and market discipline in the euro area
The euro area continues to suffer from critical weaknesses that are the result of a poorly designed fiscal and financial architecture, but its members are divided on how to address the problems. This column proposes six reforms which, if delivered as a package, would improve the euro area’s financial stability, political cohesion, and potential for delivering prosperity to its citizens, all while addressing the priorities and concerns of participating countries.