Can the euro hold? A proposal for a Growth and Fiscal Compact ...

Can the euro hold? A proposal for a Growth and Fiscal Compact Mario Tonveronachi University of Siena, Italy The Global Economy in a Time of Uncertainty: Capitalist trajectories and progressive alternatives Conference organised by Ideas, Muttukadu, India, January 24-26, 2012 The euro construction The institutional design: add pre-entry convergence and post-entry consistency to national sovereignty Requirements: correct sets of pre-entry and post-entry rules and their enforcement

2 What went wrong Wrong sets of rules and lack of enforcement Pre-entry lack of enforcement: non-complying countries into the euro Pre-entry insufficient rules: admittance of countries with dodgy accounting and evident macroeconomic imbalances Post entry lack of enforcement of fiscal discipline Post entry lack of enforcement of common non-lax financial

supervisory practices Post entry divergent national policies 3 What went wrong The result: increasing structural divergences in the real and financial sectors 4 A new design A medium-long term credible design, also necessary as reference for short-term adjustments

Presently, no room for a profound revision of the EU Treaties Room of manoeuvre given by the Treaties: Political and policy discretion at EU and national level Public investment Current-account symmetric adjustments Limits posed by existing EU Treaties: non-bail out clause and limited scope by ECB on public debts

New agreements are permitted for more stringent rules, but not for weaker ones 5 Recent reforms and official proposals Economic Governance Procedure: European semester Content: Coordination of National Programmes on Stability (fiscal sustainability) and Reform (growth) Rules:

Six pack: stronger enforcement of fiscal rules and surveillance on macroeconomic imbalances Fiscal compact: constitutional 0.5% max structural deficit rule + 1/20 debt rule Growth is reduced to the correction of imbalances so that the solution of multiple equilibria goes towards deflation Firewall: ESM, a European fund to finance illiquid governments, to manage in collaboration with the IMF 6 Recent reforms and official proposals Financial governance

New institutional framework for financial regulation and supervision National supervisors retain crucial discretion The link between sovereign and financial crises was not severed 7 A Growth and Fiscal Compact Add a Growth Compact with the same level of enforcement as the Fiscal Compact Framework of Europe 2020: employment, innovation, education, social inclusion and climate/energy

Expand existing programmes (e.g. EU flagship initiatives) and use flexibilities to insert growth initiatives into the European Semester Add a Growth European Fund to the ESM Problems: Enforcement Funding 8

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