Each day seems to bring a new idea that proponents claim will get us out of the crisis. No matter which of these policy paths politicians eventually choose they are likely to find it blocked by neither Greece nor Ireland being able to repay all of their outstanding debts. The way out can only be cleared by a decisive restructuring of these debts – the sooner the better.
The EU is at a crossroads. One way is the high road towards a fiscal union and the low road takes us back to each state fending for itself, the paradigm that prevailed before Greece was ‘rescued’. Euro-federalists have suggested everything from minimalist E-bonds to a complete fiscal union. Sceptics have called for kicking troubled countries out of the Euro zone.
Political expediency and economic logic rules out such a break up and political stalemate and public opinion stand in the way of a fully fledged fiscal union. The only feasible option lies in the middle. Since the announcement of the Greek aid package, the EU seems to be moving along this mid-path towards a 'shadow fiscal union'.
“The treaty change discussion might end up opening Pandora’s box.” “This was definitely not urgent and probably not even necessary to set up what will be a mechanism only for liquidity support not fiscal transfers.”
There have been many more banking crises than sovereign crisis and much new work has been done in response to the ongoing crisis. A lot can be learnt from these that can also be applied, albeit with some changes, to managing sovereign crisis. Even with the new proposals unveiled last week, the EU sovereign crisis management framework remains dangerously incomplete.
Download our paper for the European Parliament on EU Crisis Management The ongoing EU economic governance debate is far too narrow and, to make matters worse is based on a number of flawed implicit assumptions. The discussion on how to prevent the recurrence of a future sovereign crisis in the Eurozone assumes that the crisis was a result of the lack of willingness rather than a lack of ability on behalf of MS governments to take appropriate corrective measures.