Vox
October 12, 2011
The Eurozone is staggering under the weight of serious problems, including a democratic deficit for greater fiscal union; missing incentives for the fundamental structural reforms expected but not delivered by monetary union; failure to narrow divergent unit labour costs; burden sharing widely perceived to be unfair; and a loss of confidence among edgy international investors. This column argues that conditional euro bonds could help resolve these problems.
The Eurozone is now in an existential crisis. Weak fiscal discipline, profound differences in labour market, credit, and housing institutions, failures in financial regulation, and a common interest rate have all led to unsustainable internal imbalances. These are visible in divergences in competitiveness, possibly unsustainable government debt-to-GDP ratios as well as in other symptoms such as persistent balance-of-payments deficits. However, the financial fraud committed by Greek politicians and civil servants from pre-entry to 2009 marks Greece out as a special case.
It has often been argued that a monetary union will disintegrate without a fiscal union – for which the Eurozone lacks the democratic institutions. A resolution of the Eurozone crisis needs to address this fundamental issue. It needs to create the right incentives through a mixture of sticks and carrots to enable the poorly performing economies to return to economic growth and to avoid a future existential crisis. It needs to discourage moral hazard and arrive at a fair distribution of burden sharing between tax payers in different countries and holders of sovereign and bank bonds. A common currency rules out currency depreciation but the history of successful currency depreciations offers important sign-posts – how to mimic the consequences of such depreciation without actually abandoning the euro.
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