Overcoming Euro Area fragility

Andrew Watt and Sebastian Watzka
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Sebastian Watzka: Macroeconomic Policy Institute (IMK)

No 139-2018, IMK Report from IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute

Abstract: Some important progress has been made since the crisis, belatedly and often imperfectly, in reforming the institutional framework of the Euro Area. However, the existential weaknesses - redenomination risk given doubts about the effectiveness of the Lender-of-Last-Resort function and the inadequacy of measures to address inherent divergence trends between member countries - have not been resolved. For as long as that is so, the euro area will remain on shaky ground. This report reviews proposals to strengthen the institutional setup of the euro area. A package is proposed that would rectify the over-reliance on the ECB as a firefighter, and put euro area institutions and member states - with the involvement of governments, parliaments and social partners - in charge of dealing with intra-euro area imbalances and keeping growth close to potential. The more a preventive approach can be reinforced, the less recourse is needed to euro-level emergency measures, the greater will be the confidence that such measures can be introduced without risking "moral hazard".

Pages: 19 pages
Date: 2018
New Economics Papers: this item is included in nep-cba, nep-eec, nep-knm and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:imk:report:139-2018

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