“Triple-knot” fiscal safety for the Eurozone

by Hans Gersbach

Vox
September 8, 2011

Many economists are calling for new rules in European governance to put a stop to the Eurozone crisis, with some going so far as to suggest steps towards political union. This column outlines an institutional framework – a proposal the author calls “Reciprocal Parliamentary Approval” – that may help to restore the fiscal stability many see as vital to the survival of Europe’s single currency without states surrendering their sovereignty.

To ensure its own viability and the long-term wellbeing of its citizens, a monetary union does not have to be a fiscal union. But it does require some common line of fiscal action. As we have seen, the line of action taken up to now is failing to produce results. Without swift – and fundamental – institutional reforms of the Eurozone, our chances of resolving the current debt crisis and avoiding future incidents of the same nature are slim (see for example Pincus and Robinson 2011). It is, however, unclear what kind of rules should be chosen and implemented (see for example on this site Buti and Larch 2010, Cooley and Marimon 2011, De Grauwe 2010, Gersbach 2010a, Manasse 2010, Suarez 2011, and Wyplosz 2010).

The institutional approaches that have been suggested to help restore fiscal safety in the Eurozone range from centralised fiscal policy, temporary financial assistance through the European Stability Mechanism and strengthening of the Stability and Growth Pact to cementing the credibility of the no-bailout rule (see Fuest 2011).

With the exception of the fiscal union approach, all reform packages negotiated at European summits this year feature the last three elements. But there is considerable uncertainty as to how much can and will be done to make the no-bailout threat more credible. This threat is directly linked to the credibility of orderly bankruptcy procedures for banks and countries in the case of crises.

While the current move to introduce new institutions in the Eurozone may indeed foster a sense of fiscal responsibility, such institutional structures would be of greater complexity, and the enforcement of their decisions might also prove difficult.

In this column I want to outline an alternative institutional framework that would provide taxpayers with better control rights in connection with budget deficits and public debt in the Eurozone. In addition, this framework might in fact ultimately stiffen the Eurozone's democratic backbone.

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