Academic journal article Romanian Journal of European Affairs

Eu Economic Governance Reform: Are We at a Turning Point?

Academic journal article Romanian Journal of European Affairs

Eu Economic Governance Reform: Are We at a Turning Point?

Article excerpt

Abstract**: The sovereign debt crisis is creating enormous anguish in the EMU. Not surprisingly, emergency measures continue to be used at a time when a sort of economic recovery seems to be underway. Against this background the European Council summit of last October considered a Task Force report with a telling name: "Strengthening economic governance in the EU". This document is to be examined in conjunction with the governance reform proposals issued by the European Commission at the end of September and related documents. For the depth of this financial crisis and the "Great Recession" have forced EU governments and EU institutions to take a hard look at the governance structure of the Union. But it would be wrong to say that this demarche is an attempt to explore a terra incognita. From the very beginning of the European Monetary Union (EMU) there was some discomfort with its institutional underpinnings and there were misgivings regarding its optimality as a currency area. This explains why a train of thought underlines a political rationale, too, for the creation of the EMU. Likewise, criticism regarding the way regulation and supervision have been established in the Union is not of recent vintage. And insufficiencies of the Stability and Growth Pact (SGP), with almost all member states flouting its rules at various points in time, have been repeatedly pointed out. This said, however, the flaws of financial intermediation have been less tackled by policy-makers and central bankers for reasons which, partially, are to be found in a paradigm which has dominated economic thinking in recent decades. This paper focuses on roots of the huge strain in the EU (EMU) and main policy issues ensuing from the current crisis. It also looks at the stake NMSs have in a reformed EU economic governance structure. The challenges for EU economic governance reform are to be seen from a broad perspective: the crisis of the financial intermediation system; the sub-optimal character of the EMU; institutional and policy underpinnings of the EU (EMU) including the regulation and supervision of financial markets; the capacity of the EU to deal with global imbalances, etc. Nota bene: there is a "political reality" which constrains decisions in the EU; the latter is not a federal state and what appears to be rational when defined strictly economically may clash with implications of the political configuration of the Union.

Keywords: EMU, economic governance, fiscal policy, financial markets, economic crisis

1. Roots of the strain in the EU and policy issues

1.1 A flawed financial intermediation system

Financial stability has staged a formidable comeback on the policy-making agenda in advanced economies. Episodes of financial crises did occur in emerging economies during the past century recurrently. But they were thought about as a specific phenomenon of poorly developed financial systems and fragile institutions. Once the crisis engulfed almost the whole industrialized world1 a watershed chain of events has taken place. The current crisis has shown that something is structurally wrong with financial markets. The financial crisis cannot be explained only by years of cheap money and growing imbalances in the world economy. Mistakes in macroeconomic policy were accompanied by gross abuses of securitization, excessive leverage, abnormally skewed incentives and a loss of moral compass, inadequate risk-assessment models and failures to check for systemic risks, a breakdown of due diligence and an almost blind belief in the self-regulating virtues of markets. Structure is key in understanding the current crisis. For, on one hand, it can derail even brilliantly conceived policies; on the other hand, for it can shape policies wrongly. For instance, complacency vis-à-vis the expansion of financial entities overexposes economy to major risks (like it happened with Iceland, Ireland, UK, etc). Or take a premature opening of the capital account, as it happened in numerous emerging economies, and the policy approach which propounded total deregulation of financial markets as a means to foster economic growth. …

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