How to make the Economic and Monetary Union more resilient?

Erik Canton, Philipp Mohl, Adriana Reut and Melanie Ward-Warmedinger

Quarterly Report on the Euro Area (QREA), 2016, vol. 15, issue 3, 7-18

Abstract: In the absence of nominal exchange rate policies, euro area Member States need to absorb economic shocks via internal adjustment processes. The assumption that the launch of the euro would initiate a structural convergence process increasing economic resilience across euro area countries turned out to be too optimistic. Instead, differences in economic structures contributed to the length and depth of the last crisis and still pose a significant risk to the proper functioning of the Economic and Monetary Union (EMU). There is a broad consensus about the need to enhance convergence in economic resilience in the euro area Member States. This Section explains that economic resilience can be strengthened by lowering a countryís vulnerability/exposure to economic shocks (likelihood of shock occurrence) and/or by fostering its capacity to adjust to shocks that may occur, namely by reducing their persistence and minimising their amplitude. In product markets, adjustment capacity can be improved by policies fostering the reallocation of productive resources, such as deregulation or reducing the cost of starting or closing a business. Flexible labour market policies, in tandem with social protection for individuals, can facilitate the adjustment capacity of the labour market while at the same time providing workers with better labour market attachment, financial security and skills support. A promising way to strengthen resilience in the area of taxation would be to remove tax distortions that encourage excessive corporate and household leverage. These measures would help to foster inclusive growth. Finally, it remains vital for the resilience of the euro area to prevent and correct macroeconomic imbalances before they get out of hand.

Keywords: convergence; economic resilience (search for similar items in EconPapers)
Date: 2016
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