Academic journal article Global Economic Observer

EMU after the Crisis: Key Challenges

Academic journal article Global Economic Observer

EMU after the Crisis: Key Challenges

Article excerpt

1. Introduction

The global financial crisis which started in USA in 2007/2008 was followed by the euro area sovereign debt crisis which had a deep impact on EU's economic growth and macro-financial stability, the most affected country being Greece. Despite some important reforms in fiscal field, EMU seemed the most hit part of EU, due to the fragmentation of financial markets combined with the vicious circle between banks and sovereigns and different fiscal policies associated with macroeconomic imbalances and great policy mistakes and market failures. After the crisis, some important challenges confronted the EMU, like low potential growth, large macroeconomic imbalances in some MS, weak adjustment capacity, insufficient fiscal consolidation in good times and a supervisory capacity not keeping pace with financial integration (Robert Kuenzel and Eric Ruscher, 2013). To have a better coordination of policies and to deepen the economic integration by completing EMU, a banking union as a part of a larger financial union and a fiscal union are taken into consideration together with more political integration. Brexit shock and uncertainties in both banking sector and political spectrum may raise some questions regarding the future of monetary union and even of the EU. It is evident that financial stability must prevail in the face of price stability (targeting the inflation), vicious circle between banks and states should be broken, macroeconomic imbalances such as external imbalances, house price or credit developments have to be prevented and counteracted, a strong enforcement of SGP rules must be provided.

2. Report of the 5 presidents: Completing Europe's Economic and Monetary Union

It was a direct result of Euro Summit of October 2014 asking for a closer coordination of economic policies within EMU by developing mechanisms for this coordination, convergence and solidarity, and also for better economic governance. The report prepared by 5 presidents (EC, Euro Summit, Eurogroup, ECB, EP) reflects their opinions, exchange of ideas, intense discussions with MS and civil society, content of previous similar reports. A deeper EMU involves transparency, preserving the integrity of the Single Market and completing the four fundamental freedoms, strengthening the elements needed to boost economic union.

A. The Nature of a Deep, Genuine and Fair Economic and Monetary Union

There is no doubt that the financial and economic crisis led to the explosion of fiscal deficits and public debts in the euro area also affecting the project of the monetary union. Further steps are needed to complete EMU in order to achieve a balanced economic growth and price stability and also a competitive social market economy. Currently, Euro adoption is a political and economic project but for its full success is necessary for the MS to: a) to better prevent crises by means of a high quality governance at European and national level, sustainable fiscal and economic policies, and fair and efficient public administrations; b) to respond effectively to any economic shock by means of fiscal buffers and risk-sharing achieved through integrated financial and capital markets. Significant divergence across the euro area in fiscal policy creates fragility for the whole Union and progress is needed towards a genuine Economic Union, based on common structural features, towards a Financial Union, based on a Banking Union and a Capital Markets Union, insuring the integrity of euro and risk-sharing with the private sector, towards a Fiscal Union, meant to provide fiscal sustainability and fiscal stabilization, towards a Political Union, based on democratic accountability, legitimacy and institutional strengthening.

In order to build the four interrelated unions were designed short and long term measures organised in two consecutive stages: Stage 1 between 1 July 2015 and 30 June 2017 (deepening by doing), the aim is to boost competitiveness and structural convergence, to complete the Financial Union, to achieve and maintain responsible fiscal policies at national and euro area level, and to enhance democratic accountability; Stage 2 between 30 June 2017 and December 2025 (completing EMU), aiming at increasing the convergence process by using a set of commonly agreed benchmarks for convergence as an essential condition to participate in a shock absorption mechanism, Stage 3 (Final) at the latest by 2025, when a deep and genuine EMU will provide economic stability and social prosperity and will offer a positive example for non-euro states to join EMU. …

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