Reforming the euro area: Where do we stand

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Presentation transcript:

Reforming the euro area: Where do we stand Jean Pisani-Ferry* CEPII-CESifo-DIW-OFCE conference Paris, 8 July 2016 * Hertie School, Berlin, and France Stratégie, Paris DATE / 00/00/2014 Titre de la présentation

Time to get serious (again) Brexit Economic risk Political risk Market risk On the agenda Economic revival Economics of currency union Politics of monetary integration DATE / 00/00/2014 Titre de la présentation

What problems? Infrastructure Integration within European market Economic resilience Growth potential Legacy Debt Banks Real exchange rates Unemployment Policy principles Supply / demand Individual responsibility / risk sharing Governance model DATE / 00/00/2014 Titre de la présentation

Where / why do we disagree? Not fundamentally on infrastructure Domestic agenda and EMU agenda largely coincide Issues to be solved: Integration (pan-European banks; labour mobility) Reform commitment A lot on legacy issues Creditors vs. debtors Skeletons in the cupboard Question: can we find agreement on policy principles? Cognitive dissonance (alternative crisis models) Preference heterogeneity Compatibility with domestic political systems 5P report: the wrong strategy Rather: blueprint first, then address legacy issues DATE / 00/00/2014 Titre de la présentation

Supply / demand: an economists’ dispute French and German economists argue at length over the appropriate fiscal stance In reality: French fiscal policy not that stabilising (especially bad at consolidating in good times) German fiscal policy not that procyclical (especially good at consolidating in good times) Implications: Do not overestimate practical importance of differences in policy philosophy Room for agreement on policy principles DATE / 00/00/2014 Titre de la présentation

Fiscal stabilisation in France, 1996-2015: 15/45 DATE / 00/00/2014 Titre de la présentation

Fiscal stabilisation in Germany, 1996-2015: 30/55 DATE / 00/00/2014 Titre de la présentation

Individual responsibility / risk sharing: Room for (good) compromise German view emphasises moral hazard, adverse effects of bail-outs French view emphasises solidarity as a quid pro quo for discipline Key in discussions on: Fiscal regime Banking union Reforms A balanced compromise: Debt restructuring scheme based on ESM Full banking union with deposit guarantee and fiscal backstop Common safe asset Fiscal discipline rules DATE / 00/00/2014 Titre de la présentation

Governance model: Room for triangulation French view emphasises discretion and coordination German view emphasises rules and competence delineation Both often inconsistent: F reluctant to rules-based coordination G reluctant to delegation to EZ level Result: messy, ineffective and illegitimate governance In reality three possible models: Full decentralisation and market discipline (à la Ashok Mody) Common targets + coordination (e.g. Villeroy’s MOF) Federalisation and common institutions (EZ budget) Problem: hard to compromise between (a) and (b) but F and G reluctant to (c) Room for clever triangulation? Hub and spoke model for national fiscal policies: strong common institutions, strong national institutions (fiscal councils, productivity councils) Limited fiscal capacity at EZ level for spending on common public goods and contingent aggregate stabilisation DATE / 00/00/2014 Titre de la présentation

Thoughts on legacy issues Significant efforts to address legacy issues without fiscal transfers (see e.g. recent CEPR report) Useful attempts but do not design the permanent regime with a view on addressing legacy problems Better pay one-off price for legacy than accept permanent design flaw DATE / 00/00/2014 Titre de la présentation