Avoiding Another Crisis in the Euro Area: Public and Private Imbalances and National Policy Responses

Abstract

Early critics of the euro’s design pointed to the disruptive potential — both political and economic — of country-specific shocks in a monetary union that is a far cry from an optimal currency area. The euro crisis has confirmed the risks associated with a ‘one-size-fits-all’ monetary policy, decentralized financial supervision, and inadequate fiscal backstops. This article examines how the active use of national fiscal policies and macroprudential policies can mitigate these risks. Cross-border coordination of macroprudential policies is essential to ensure their effectiveness. In addition, area-wide reforms are necessary including a more complete banking union with a well-funded common backstop.

key words:

• Euro crisis
• macroprudential policies
• international policy coordination

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. SSM is the first pillar in the new Banking Union. The Single Resolution Mechanism with the Single Resolution Fund constitutes a second pillar, while the Deposit Insurance Scheme is the third pillar.

2. In comparing macroeconomic surveillance by the EU and IMF, Moschella (2014) also finds fault with the MIP’s asymmetric treatment and single-country, rather than systemic, focus, offering factors that may help explain the limited learning from IMF experience.

3. Fiscal policy is considered by the EC to be too cumbersome to utilize effectively for short-term demand management because of the need to involve national parliaments, which complicates coordination issues. Moreover, national (EU) fiscal multipliers are generally considered by the EC to be very small under normal circumstances.