Vox
January 9, 2012
High debt levels, house price booms, uncompetitive labour markets – the list of possible reasons why some European countries are facing the wrath of the market are many. This column argues that they all boil down to one measure – inflation. Using the inflation differentials as a guide is the first step to seeing what countries need to adjust – and by how much.
The euro was created on the premise that no extreme country-specific imbalance would ever pose a threat to the stability of the common currency area. An intergovernmental covenant on the Stability and Growth Pact was considered, on its own, to be sufficient. But recent crises in euro bond markets have highlighted the structural problems and the deficiencies of the euro architecture.
In response, led by Germany and France, the EU members have now agreed on adopting new budgetary arrangements that could eventually lead to fiscal federalism. At the same time, they have also agreed to enlarge the funds available to deal with the short-term problems. Indeed, budgetary integration is a necessary condition for running a currency union. So are interventions to contain the potential disruptive effects of high-risk premia on government debt that arguably reflect a combination of fundamental analyses and belief-driven speculations.
Yet, intra-Eurozone imbalances are not going to disappear overnight, and their re-emergence in different forms cannot be ruled out in the future. What can complement the new fiscal compact, to ensure the future of the euro?
More
No comments:
Post a Comment