EURO zone crisis and EU governance: Tackling a flawed design and inadequate policy arrangements

Daniel Dăianu ()
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Daniel Dăianu: The National School of Political and Administrative Studies, 6 Povernei Street, sector 1 Bucharest, Romania

Acta Oeconomica, 2012, vol. 62, issue 3, 295-319

Abstract: This paper focuses on the roots of strain in the European Monetary Union (EMU). It argues that there is need for a thorough reform of the EU governance structure in conjunction with radical changes in the regulation and supervision of financial markets. The EMU was sub-optimal from its debut and competitiveness gaps did not diminish against the backdrop of its inadequate policy and institutional design. The euro zone crisis is not related to fiscal negligence only; over-borrowing by the private sector and poor lending by banks, as well as a one-sided monetary policy also explain this debacle. The EMU needs to complement its common monetary policy with solid fiscal/budget underpinnings. Fiscal rules and sanctions are necessary, but not sufficient. A common treasury (a federal budget) is needed in order to help the EMU absorb shocks and forestall confidence crises. A joint system of regulation and supervision of financial markets should operate. Emergency measures have to be comprehensive and acknowledge the necessity of a lender of last resort; they have to combat vicious circles. Structural reforms and EMU level policies are needed to enhance competitiveness in various countries and foster convergence.

Keywords: integration; financial crisis; EMU; sovereign debt; governance reform (search for similar items in EconPapers)
JEL-codes: F15 F36 F41 G21 H60 (search for similar items in EconPapers)
Date: 2012
Note: This text is a revised version of the paper presented at the CASE annual conference in Warsaw, 18 November, 2011. I amgrateful to the participants at that conference and the two anonymous referees for their comments. However, I bear sole responsibility for the views expressed in this paper.
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