A new framework for fiscal policy consolidation in Europe

by Peter Bofinger and Stefan Ried

VOX
May 20, 2010

Current developments in Greece have raised doubts over the efficacy of the European Stability and Growth Pact. This column proposes a new framework for fiscal policy consolidation in Europe to deal with the ongoing fiscal exit and its related phenomena of crisis. On centre stage should be a European Consolidation Pact.

Eighty-one years after Gustav Stresemann raised his voice in front of the League of Nations to call for a European currency, the object of his wish is in a devastating state. When the European Currency Unit was introduced 50 years after Stresemann’s speech, it took about a decade for Europe to find itself in choppy waters, with Italy deciding to devalue the Lira and the UK to leave the exchange rate mechanism. When the euro superseded the currency unit in 1999, again it has taken about a decade for Europe to find itself in choppy waters. The plot of the current crisis resembles that of 1992; markets spotted potentially unsustainable developments in some member countries and put their finger on the weak spots. As in 1992, the countries in trouble face twin deficits, and like those days, reactions by other EU members and the European Commission did not give the impression of being in control of the situation – perhaps until 9 May. Yet steps towards a persuasive handling of the situation are still hopelessly disconnected.

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