Some Policy Proposals for the Euro Malaise

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Book Chapter

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As Spain demonstrates, the fundamental cause of the Euro crisis is not improper fiscal management. Of at least equal importance are the external imbalances, the lack of governance, the lack of clarity in the Maastricht Treaty concerning the “no bailout clause,” and the disregard of how to cope with any crisis. Therefore, the focus on reinforced fiscal rules and associated penalties in the changes to the Treaty is dealing neither with the causes of the crisis nor with the magnitude of the institutional mess. Some analysts go much further and argue that a monetary union needs a fiscal union to succeed (Trichet 2011; Goodhart and Schoenmaker 2011; Marzinotta et al. 2011; Wyplosz 2011). Italy demonstrates the fallacy of this argument. Before the euro, Italy had a monetary and fiscal union. Every year since the 1950s, billions of euros were channeled from the north to the south of Italy. Fifty years later the productivity differences have, if anything, widened. Europe is unlikely to be a better fiscal transfer manager and, if history is any guide, is unlikely to create conditions necessary for eliminating corruption and organized crime. A transfer union is therefore premature and not a solution to the problem. What is needed are two types of measures. The first set of measures are ad hoc and serve to get out of this crisis, with the clear commitment to its once-and-for-all nature. Second, Treaty changes are needed to render the monetary union more robust and to define better responsibilities for each member.


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