You are here: Home Knowledge Base Holistic Approaches to Solve the Euro Crisis Solutions Fiscal sustainability requires permanent national fiscal rules and a temporary eurozone fiscal relief mechanism
Symposium 2013

Solution for Holistic Approaches to Solve the Euro Crisis

The Challenge

Fourteen years after its foundation, the European Monetary Union (EMU) is facing the greatest challenge of its history thus far. High unemployment in a number of member countries, the need for substan ...

Fourteen years after its foundation, the European Monetary Union (EMU) is facing the greatest challenge of its history thus far. High unemployment in a number of member countries, the need for substantial consolidation of the budgets of numerous governments, and distressed banks are symptoms of economic misalignments and economic policy failure that threaten not only economic prosperity in Europe, but the European project as a whole. A series of interrelated fiscal and financial crises in the euro area have provoked a series of extraordinary policy measures. Some of these measures have undermined the fiscal sovereignty of affected countries, and they have circumvented market mechanisms. As social cohesion is called into question in various debtor countries, there is a danger that policy makers cannot or will not solve the existing problems in a way consistent with both monetary stability and the current political integration. The ECB’s announcement to possibly step in via its OMT-program has somewhat calmed down financial markets since mid-2012, but most of the fundamental questions for the future of Europe are either unanswered or answered quite differently by various parties. Policy makers have bought time, but the question remains what this time is used for and where the current policy stance leads to.

Fiscal sustainability requires permanent national fiscal rules and a temporary eurozone fiscal relief mechanism

To ensure adequate fiscal consolidation while retaining national fiscal sovereignty, each country should individually implement a binding national fiscal rule that guarantees the long-term sustainability of government debt, while leaving room for countercyclical fiscal policy. Playing according to these rules will re-establish confidence in the sustainability of the member states’ fiscal stances. Because this process takes time, the community of the eurozone member states should establish a European 'interest burden equalization scheme' for a period of five years. Countries that can finance themselves in the capital markets at better-than-average conditions relinquish part of their interest rate advantages to the benefit of the countries that have to pay higher interest rates. To qualify for payments from the interest burden equalization scheme, countries must undergo a solvency test, adopt a national fiscal rule and implement structural reforms. The European Commission would evaluate whether a country fulfills these conditions.

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