Changes in Eurozone Governance after the Crisis and the Issue of Growth

Abstract

The Eurozone countries are still seeking a way out of the crisis that has been affecting the European Monetary Union (EMU) since 2010. Sovereign debt crises, difficulties in the banking system and large current account imbalances have characterized the euro crisis, while several countries of the Eurozone have entered a phase of slow and even negative growth. All this has put at risk the sustainability of the EMU, leading to a climate of distrust surrounding the future of the single currency. The crisis of the Eurozone has shown that a sustainable currency union requires more governance because of the higher degree of economic, financial and fiscal spillovers between euro member countries. However, the crisis has led to significant changes in the institutional framework of the EMU and in the economic policies of the Eurozone, highlighting, above all, the role of the ECB. The present contribution analyses these changes in Eurozone governance and discusses whether they are the correct solutions to the crisis; in addition it focuses on the unresolved issue of growth in the peripheral Eurozone countries.

Rules, Imbalances, and Growth in the Eurozone

“…The basic idea behind this doctrine is to make the Eurozone countries less divergent in terms of competitiveness. In short, national governments have to pursue fiscal discipline and supply-side reforms to meet the objectives of the reformed EMU rules (Schilirò, 2014). The diagnosis that focuses on the loss of competitiveness in the periphery as a result of wage growth inconsistent with underlying productivity trends was stressed by Trichet (2011), Werner-Sinn, Valentinyi (2013), Estrada, Galì, Lopez-Salido (2013), and others.…”

“…Eurozone member countries have taken the benefits of the single currency for granted without acknowledging their shared responsibility. But the true problem is that Eurozone authorities have been trying to survive the emergencies caused by the crisis following a 'muddling through' strategy, seeking to improve the governance of EMU without changing its purposes and perspectives (Schilirò, 2014).…”

“…In addition, an explicit commitment to common objectives is necessary not only in economic and monetary policy but also in the political and social sphere. Consequently, this new pact calls for a profound change in the European treaties (Schilirò, 2014). One essential aspect of the Eurozone is that it has not been homogenous since the outset of the monetary union (Schilirò, 2013a).…”

“…In any case the EDIS must be embedded in a global context, not just regional (the Eurozone), since financial markets are global and interconnected. Financial stability needs appropriate monetary and fiscal policies and the correct institutional design, therefore a complete banking union would require that the ECB's lender of last resort role for banks should remain a regular feature of EMU, and thereby enhance its resilience (Obstfeld, 2013;Schilirò, 2014). Moreover, the banking union would require at least some centralized fiscal capacity (Pisani-Ferri, Wolff, 2012;Obstfeld, 2013).…”

Governance and Institutions for Stability and Growth in the Eurozone

“…The Council, however, is continuing to work at a technical level on the Commission proposal for the establishment of EDIS with the aim of strengthening the banking union.5 OMT had spillover effects on fiscal policy(Schilirò, 2014).…”