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A European New Deal

The only way out of the euro crisis is a New Deal for Europe, with governance at its heart. Europe’s transfer union must give way to a genuine fiscal union, which implies EU resources and policies that are sufficient to correct the monetary union’s inevitable asymmetries.

FLORENCE/ANN ARBOR – The eurozone has reached a crossroads. European policy prescriptions have proven inadequate, and there is no consensus on the right balance of fiscal consolidation and economic stimulus – or on how much fiscal solidarity a functioning monetary union requires.

Disagreement over Eurobonds exemplifies the European Union’s current dilemma. Overstretched sovereign borrowers on the eurozone periphery argue that issuing government securities backed by all eurozone countries is the only way out of their “debt trap.” But, without common economic governance, northern Europeans contend, mutualization of debt would encourage free-riding by debtor countries.

In fact, both sides are right. So, in order to neutralize moral hazard, northern European countries seek a guarantee that their profligate peripheral neighbors maintain discipline, reflected in steps taken toward greater Europe-wide governance of national fiscal policies. Indeed, EU leaders are focusing on more European rules to discipline national governments.

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