posted on 17 February 2016
-- this post authored by Richard Baldwin and Francesco Giavazzi
Important progress has been made in repairing the design faults that the EZ Crisis revealed. This column introduces a new VoxEU eBook which argues that fixing the Eurozone is a job half done. The eBook, which presents 18 chapters by leading economists that hail from a broad range of nations and schools of thought, is surely the most comprehensive collection of solutions that has ever been assembled.
The Eurozone was from rocked by turmoil and high drama from 2010 to 2015. Compared to those tumultuous times, it is easy to think that the worse of the Crisis is behind us. This is a mistake.
The Eurozone remains a damaged vessel. It has been made seaworthy with makeshift solutions and half-measures. The ECB's resolve and the gradually improving macroeconomic performance is keeping the euro afloat for now. But this is accomplished by something akin to bailing the water out of the boat as fast as it leaks in.
European leaders must very soon find permanent and coherent solutions to the Eurozone's shortcomings. It is time to cast aside national and ideological prejudices and engage in an open-minded discussion of what more needs to be done to restore stability and prosperity in Europe. The time to start is now. Millions of Europeans - above all Europe's young - are paying an unconscionable price for EZ leaders' failure to finish the job of fixing the Eurozone.
This column introduces a new VoxEU.org eBook:
that we hope will foster the development of solutions that can fix the Eurozone before the next crisis strikes Europe's monetary union. Each chapter presents solutions to one or more of the main challenges facing the Eurozone.
The Rebooting Europe project
The first eBook in the Rebooting Europe project collected essays from a wide range of leading economists on a simple question: "What caused the EZ Crisis?" (Baldwin and Giavazzi 2015). This second eBook in the series collects essays on an equally simple question: "What more needs to be done to fix the Eurozone?"
To provide a common base for answering the how-to-fix-it question, we started a process that extracted a 'consensus narrative' on what caused the EZ Crisis. The idea was that it would be easier to find agreement on how the monetary union should be fixed, if we first found agreement on how and why things went wrong during the EZ Crisis. The result was an essay (published in November 2015). Although not all the authors of the first eBook were willing to put their name to it, the document "Rebooting Europe: Step 1 - agreeing a crisis narrative" was ultimately signed by 16 leading economists hailing from a broad range of views. It has garnered support from more than 90 other eminent economists and been viewed almost 50,000 times on VoxEU.org.
The 2nd eBook: What more is needed to fix the Eurozone?
The new eBook has 18 chapters and many of these present multiple reform proposals, or packages of reforms. We cannot possibly do justice to all of these in this short Vox column (see the list of columns at the end of this Vox column). What we can say is that all the authors agree that more needs to be done.
As Agnès Bénassy-Quéré writes in her chapter:
The same has been recognised by the so-called Five Presidents' Report:
While the Five Presidents' Report was an important step in getting the debate going, it seems to be unrealistically ambitious in the long run - essentially pushing all the way to something like a United States of Europe. At the same time, it is insufficiently ambitious in the short run - shying away from reforms that would require a Treaty change.
Our authors almost all start from the perspective that fixing the Eurozone will require changes in the Treaty. Half-measures and muddling through will not do the job. They take a fresh look at the problems and potential solutions using clear economic reasoning and the best available evidence. Most authors question some or all of the ideas in the Five Presidents' Report.
The full range of coherent solutions
This eBook is surely the most comprehensive collection of solutions that has ever been assembled. The chapters gives readers a full overview of virtually all the problems and all the serious proposed solutions (including a number of proposals that have not appeared elsewhere).
Although they disagree on solutions, our authors broadly agree on the list of things that needed to be fixed. These include:
Each chapter presents solutions to one or more of these challenges, and several of the chapters view solutions to one problem as inexorably linked with the solution to one or more of the other problems.
Lessons learned and progress to date on fixing the Eurozone
At the outset, we must acknowledge that there is nothing novel about the notion that the Eurozone needs completing. Most of our authors have published on this topic since the EZ Crisis struck (see their individual chapters for references). The basic shortcomings have been known and discussed by economists since the euro was launched. This may be seen as reassuring in the sense that the realisation that the Eurozone has shortcomings does not depend on elaborate new theories, empirical findings, or controversial interpretations of the EZ Crisis. Based on nothing more than simple economic logic and basic economic facts, many flaws were obvious from the start.
For example, a CEPR report wrote:
These problems were swept under the rug during the halcyon days of the Eurozone's first decade.
Fixing the Eurozone is a job half done. As one of the authors in this eBook, Nobel Prize winner Chris Pissarides, writes:
Given the wide range of shocks arising from the current situation in Europe and beyond, now is not the time to relax. The job of fixing the Eurozone must be completed sooner rather than later. At their summit next week, EU leaders should find the time to restart the process of repairing Europe's monetary union.
List of chapters and authors
Part 1: Complete reform plans
Minimal conditions for the survival of the euro
Barry Eichengreen and Charles Wyplosz
Maastricht 2.0: Safeguarding the future of the Eurozone
Lars P. Feld, Christoph M. Schmidt, Isabel Schnabel and Volker Wieland
A sovereignless currency
The Eurozone's Zeno paradox - and how to solve it
Part 2: Focusing on completing the Banking Union, and financial markets
Completing the Banking Union
Safeguarding the euro - balancing market discipline with certainty
The EZ Crisis: What went wrong with the European financial integration?
Part 3: Focusing on fiscal and monetary policy
Building common fiscal policy in the Eurozone
Rebooting Europe: Closer fiscal cooperation needed
How to reboot the Eurozone and ensure its long-term survival
Paul De Grauwe and Yuemei Ji
Policies and institutions for managing the aggregate macroeconomic stance of the Eurozone
Giancarlo Corsetti, Matthew Higgins and Paolo Pesenti
Asymmetries and Eurozone policymaking
ECB in Eurozone policymaking: Going forward
Refet S. Gürkaynak
Part 4: Focusing on structural and institutional reform
The Eurozone needs less heterogeneity
Balance-of-payments adjustment in the Eurozone
Needed: A European institutional union
Part 5: Dealing with legacy debt
The way forward: Coping with the insolvency risk of member states and giving teeth to the European Semester
Epilogue: Future history - how the crisis might have been handled
How the Euro Crisis was successfully resolved
Barry Eichengreen and Charles Wyplosz
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