The Eurozone is at risk of economic stagnation and the crisis has led to the most pervasive and pronounced increase in government debt-to-GDP ratios since the Second World War. Member countries are facing vastly differing economic growth rates, with some displaying hardly any recovery since the crisis began. This note puts forward proposals aimed at fostering economic convergence while ensuring debt sustainability for the member states.
Countries within the euro zone are facing three main perils. The first is the problem of nominal divergences, which materialize in unit labor cost differences. The second is the lack of aggregate demand in Europe. This is the main issue in the short run. The third is the high level of public debt, which generates an issue of sustainability in some countries, like Greece. The exclusive focus on both public debt and unit labor costs has produced a demand crunch in the euro area, which is the main cause of the deflation risk and the high current account. The lack of demand is creating concerns about debt sustainability. A sustainable debt is not in fact a low public debt or a rapidly decreasing public debt. It is a public debt for which there is no risk of default. The default risk in advanced countries is not an economic risk, but a political risk. High unemployment and a long-lasting recession are eroding political support for the European project, which can ultimately reduce countries’ ability to generate a sufficiently high primary budget. All the flexibilities in the current treaty should be used to boost demand in Europe, without increasing the public debt burden of the heavily indebted countries. As some surplus countries, like Germany, have decided not to use their fiscal space, one efficient way to promote public demand is to design a public investment plan that is much bigger than the initial Juncker Plan and is financed by funds backed by either national or European debt, which could be bought by the central bank.In addition, the European Semester should clearly start with an assessment of the aggregate fiscal and monetary stance in the euro area so as to provide the desired orientation for the European policy mix. This orientation should be consistent with country-specific recommendations.
This paper argues that fiscal convergence in the Euro area has been achieved at the expenses of real divergence in unemployment, investment and, at least temporarily, growth. Statistical and econometric analysis supports the view that the current fiscal framework addressed debt sustainability concerns, but imparted a pro-cyclical bias, which contributed to economic divergence. The recent flexibility guidelines are a step in the right direction, but they are unlikely to have sizable effects. A reform of the fiscal framework and a mechanism for an intra-European unemployment insurance scheme is proposed.
This paper argues that fiscal convergence in the Euro area has been achieved at the expenses of real divergence in unemployment, investment and, at least temporarily, growth. Statistical and econometric analysis supports the view that the current fiscal framework addressed debt sustainability concerns, but imparted a pro-cyclical bias, which contributed to economic divergence. The recent flexibility guidelines are a step in the right direction, but they are unlikely to have sizable effects. A reform of the fiscal framework and a mechanism for an intra-European unemployment insurance scheme is proposed.
This paper argues that fiscal convergence in the Euro area has been achieved at the expenses of real divergence in unemployment, investment and, at least temporarily, growth. Statistical and econometric analysis supports the view that the current fiscal framework addressed debt sustainability concerns, but imparted a pro-cyclical bias, which contributed to economic divergence. The recent flexibility guidelines are a step in the right direction, but they are unlikely to have sizable effects. A reform of the fiscal framework and a mechanism for an intra-European unemployment insurance scheme is proposed.
We examine economic convergence among euro area countries on multiple dimensions. While there was nominal convergence of inflation and interest rates, real convergence of per capita income levels has not occurred among the original euro area members since the advent of the common currency. Income convergence stagnated in the early years of the common currency and has reversed in the wake of the global economic crisis. New euro area members, in contrast, have seen real income convergence. Business cycles became more synchronized, but the amplitude of those cycles diverged. Financial cycles showed a similar pattern: sychronizing more over time, but with divergent amplitudes. Income convergence requires reforms boosting productivity growth in lagging countries, while cyclical and financial convergence can be enhanced by measures to improve national and euro area fiscal policies, together with steps to deepen the single market.
The global economic and financial crisis that started in 2007 exposed serious flaws in the euro's original design. This report examines why Europe's economic and monetary union was so badly affected by the crisis, and assesses whether further changes need to be made to the structure of economic governance that underpins it. A Chatham House, Elcano and AREL Report
Sovereign risk premia in several euro area countries have risen markedly since 2008, driving up credit spreads in the private sector as well. We propose a New Keynesian model of a two-region monetary union that accounts for this “sovereign risk channel.” The model is calibrated to the euro area as of mid-2012. We show that a combination of sovereign risk in one region and strongly procyclical fiscal policy at the aggregate level exacerbates the risk of belief-driven deflationary downturns. The model provides an argument in favor of coordinated, asymmetric fiscal stances as a way to prevent selffulfilling debt crises.
This book offers a critical perspective from which to observe evolution of the Euro Area and the European Union in these times of growing economic and political conflict.
"The Sovereign Debt Crisis," 2012 edition, looked at how governments ran up substantial deficits in order to avert a worldwide depression and their subsequent attempts to rebalance their budgets. This updated edition concentrates on the delicate balancing act the economies of the United States, Japan, and the eurozone face between the present need to boost sluggish economic growth by providing sufficiently cheap, low-risk credit and the longer-term challenges of cutting massive debt and returning to a sustainable fiscal policy. The authors argue that many of the euro area economies, having noticeable difficulty paying their international debts, are in a sovereign debt crisis, while America and Japan are, for now, holding steady but in real danger of slipping into crisis. The book shows how the process has evolved in these three major developed economies and how their policy choices impact global financial markets.
