Minimal Conditions for the Survival of the Euro
Abstract: Most technocrats argue that creating the euro was a way of forcing the pace of political integration, since monetary union is not possible without political union. We disagree and instead put forward four minimal conditions for the survival of the euro. Political integration in Europe has its limits; the trick is to understand when less is more.
Summary (2 min read)
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- Economic theory similarly suggests limits to European political integration.
The European Central Bank
- The fi rst of their four minimal conditions for the survival of the euro is a normal central bank that is able to pursue fl exible infl ation targeting and to backstop fi nancial markets in government bonds, thereby protecting the euro area from potentially self-fulfi lling crises.
- Given the existence of a single monetary policy, there is little scope for governments to infl uence domestic infl ation rates.
- Rather than adopting a symmetric infl ation target, it pursued a target of less than but close to two per cent, dangerously skirting defl ationary territory.
- But deposit insurance is only confi denceinspiring if the funds standing behind it are adequate to meet potential claims, and the members of a monetary union, not being able to resort to central bank fi nance, may fi nd it diffi cult to come up with the necessary funds in extremis.
- Some countries, notably Germany, worry that other members will be more prone to draw on the fund (German commentators regularly cite Greece as a case in point).
Centralization of fi scal functions
- This of course begs the question of whether the wholesale centralization of fi scal functions is desirable – or whether monetary union without fi scal union will work.
- Since the Maastricht Treaty and the Stability and Growth Pact, there have been repeated efforts to centralize EU fi scal policies.
- The one thing these measures have in common is that they do not work.
- EU member states have profoundly different preferences with regard to fi scal policy.
- The framework in which taxes are raised and public spending is structured is intimately bound up with the details of each nation’s culture and history.
Europe’s banking union
- A second minimal condition for the survival of the euro is completing Europe’s banking union.
- An encompassing approach in which debt overhangs are reduced across the euro area, allowing fi scal control to be delegated to the governments of all participating member states, will help to restore the macroeconomic and fi nancial stability on which the euro’s survival depends.
- A centrally coordinated approach can also help to surmount two further obstacles to restructuring.
- If crossborder spillovers result from the bank-sovereign doom loop, then the solution is to prevent banks from holding concentrated positions in sovereign bonds, as the SSM seeks to do.
- On the one hand, fi scal positions and thus preferences with regard to restructuring differ across member states.
- The eurozone crisis has shown that monetary union entails more than just sharing monetary policies, and that the common central bank must aim at more than just price stability.
- While completing the architecture is challenging, doing so does not require a forced march to political union.
- That theory also sheds light on desirable ways of addressing the problems exposed by the crisis.
- The authors have identifi ed four minimal conditions for solidifying the monetary union.
- But irrespective of the details, some scheme must be adopted to restructure public debts comprehensively enough for eurozone countries to recover the use of their national fi scal policies.
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Q1. What are the contributions mentioned in the paper "Minimal conditions for the survival of the euro" ?
Pâris and Wyplosz this paper proposed a solution that involves centrally restructuring debts while allocating costs at national level.