Delay in adjustments only magniﬁes Europe problem
Much has been done in recent years following the Greek debt crisis to improve the functioning of European economic and monetary union. Key initiatives included the provision of intergovernmental loans to Greece, establishment of the European Financial Stability Facility (and its successor, the European Stability Mechanism) and the creation of the (still incomplete) banking union.
There has been, too, the application of stricter rules on banking regulation and supervision, the establishment of the European Systemic Risk Board and the development of appropriate macroprudential instruments to identify and address system-wide risks. The European Central Bank developed new monetary policy instruments to deal with low inﬂation and growth, and the Single Supervisory Mechanism assumed responsibility for all systemic banks in the European Union, thus addressing the home-bias issue in supervision.
More recently the European Commission, in view of the Multiannual Financial Framework for the period 2021-2027, tabled proposals to establish a Reform Support Programme and a European Investment Stabilisation Function. The new EU budgetary tools aim to bolster stability in times of stress through investment continuity and providing incentives for domestic structural reforms.
Nonetheless, the architecture of EMU is still, in many respects, incomplete. Euro area policy- makers cannot rely solely on ECB interventions. It is essential to ensure that the Commission’s macroeconomic imbalances procedure operates more symmetrically both for member states with external deﬁcits and for those with external surpluses. To date the burden of adjustment has fallen, to a large degree, on member states with current account and budget deﬁcits, such as Greece on the eve of the crisis; member states with high current account surpluses could have responded more appropriately.
Since the crisis, policy-makers have observed a home bias in investment and a ﬂow of euro area excess savings towards the rest of the world rather than within the EU. This has led to a reversal of the previously achieved ﬁnancial integration and income convergence among euro area countries.
The priority, in these circumstances, must be to complete the banking union with a European deposit insurance scheme, as well as the capital markets union. This will restore intra-European ﬁnancial ﬂows, improve stability in the banking sector and promote private risk-sharing in the EU. In this context, the role of the ESM could be enhanced to support banking union with a backstop facility.
EMU should enhance public sector risk-sharing by creating a centralised ﬁscal stabilization tool. The Commission’s proposed European investment stabilisation function could ﬁll this role. Other suggestions involve a European unemployment insurance scheme and the issuance of European ‘safe’ bonds. These ideas deserve policy-makers’ attention.
With regard to member states, national ownership and credible implementation of country- speciﬁc recommendations is crucial for promoting economic policy coordination and risk reduction. National policies should focus on structural reforms to improve the ﬂexibility of domestic markets and reduce vulnerabilities in the ﬁnancial sector. This should facilitate the adjustment of these economies to future shocks. They should also implement sound pro- growth ﬁscal policies that allow for stabilisation over the business cycle and ensure debt sustainability.
Solidarity in Europe
Policy-makers can draw several key policy messages from the Greek crisis. First, delaying necessary adjustments only magniﬁes the problem, which will then have to be addressed later on less favourable terms. Second, the proper sequencing of the reform programme as well as ownership (mainly by the government but also the main opposition parties) is key to the adjustment’s success.
Third, political solidarity and greater risk-sharing in the euro area to address large asymmetric shocks are of major importance. Pointing ﬁngers at countries in difﬁculty only propagates populist voices on all sides.
Fourth, private and public risk- sharing should be enhanced by moving forward with the banking and capital markets unions and by creating a centralised ﬁscal stabilisation tool. To avoid moral hazard, risk-sharing should go together with risk reduction and close economic policy coordination. Moreover, countries need to improve income convergence and ensure that economic rebalancing operates symmetrically.
Last but not least, a ﬁnal point on Greece: to bolster investors’ conﬁdence in the prospects of the Greek economy and to be able to reﬁnance maturing debt on sustainable terms, the government must continue to implement reforms and avoid reneging on programme-related commitments.
The years since the debt crisis have been tremendously difﬁcult for the euro area, but the European project endures. The ﬁrming up of EMU must be policy-makers’ priority in the years to come.