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Can the euro hold_ A proposal for a Growth and Fiscal Compact

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					             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




n The institutional design: add pre-entry convergence and post-entry
  consistency to national sovereignty

n 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

n Pre-entry lack of enforcement: non-complying countries into the
  euro

n Pre-entry insufficient rules: admittance of countries with dodgy
  accounting and evident macroeconomic imbalances

n Post entry lack of enforcement of fiscal discipline

n Post entry lack of enforcement of common non-lax financial
  supervisory practices

n Post entry divergent national policies


                                                                     3
What went wrong

n The result: increasing structural divergences in the real and financial
  sectors




                                                                        4
A new design
n A medium-long term credible design, also necessary as reference
  for short-term adjustments

n Presently, no room for a profound revision of the EU Treaties

n Room of manoeuvre given by the Treaties:
   q Political and policy discretion at EU and national level
   q Public investment
   q Current-account symmetric adjustments


n Limits posed by existing EU Treaties: non-bail out clause and limited
  scope by ECB on public debts

n New agreements are permitted for more stringent rules, but not for
  weaker ones

                                                                       5
Recent reforms and official proposals

Economic Governance

n Procedure: European semester
n Content: Coordination of National Programmes on Stability (fiscal
  sustainability) and Reform (growth)
n Rules:
   q Six pack: stronger enforcement of fiscal rules and surveillance on
     macroeconomic imbalances
   q Fiscal compact: constitutional 0.5% max structural deficit rule + 1/20
     debt rule
   q Growth is reduced to the correction of imbalances so that the
     solution of multiple equilibria goes towards deflation
n Firewall:
   q ESM, a European fund to finance illiquid governments, to manage in collaboration
     with the IMF



                                                                                    6
Recent reforms and official proposals

Financial governance

n New institutional framework for financial regulation and supervision

n National supervisors retain crucial discretion

n 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

n Framework of Europe 2020: employment, innovation, education,
  social inclusion and climate/energy

n 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

n Problems:
   q Enforcement
   q Funding


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