This is an excerpt from Building a Crisis Management Framework for the EU that we wrote for the Crisis Committee of the European Parliament and then presented at the European Commission. Much of the discussion in this paper remains highly relavent and provides a useful guidance to policy makers about what they need to do after stemming the panic in the markets so you would want to read it.
Despite the fact that the discussion of the euro area crisis has focused primarily on issues in the sovereign debt market, it is instructive to remember at the outset that this crisis is not primarily a sovereign crisis but one that originated in the private financial sector. As often happens in credit crises, private sector debt is taken on to public balance sheets which makes them fragile and can, as in this case, result in serious dislocations of the sovereign debt market.
Re-Define commentary on the statement from the Euro Leaders' Summit
We reaffirm our commitment to the euro and to do whatever is needed to ensure the financial stability of the euro area as a whole and its Member States. We also reaffirm our determination to reinforce convergence, competitiveness and governance in the euro area. Since the beginning of the sovereign debt crisis, important measures have been taken to stabilize the euro area, reform the rules and develop new stabilization tools. The recovery in the euro area is well on track and the euro is based on sound economic fundamentals. But the challenges at hand have shown the need for more far reaching measures. (Re-Define Comments are in italics. For Press Release Click Here and for a PDF version of this commentary Click Here.)
The recovery in the Euro area is not well on track and in fact remains very fragile with some possibility of a double dip. Moreover, our banking system remains weak both in terms of structural maturity mis-matches in funding and capital adequacy.
We may have better economic fundamentals than some other economies at an aggregate level but our decision making has been exposed as being far too slow and has seriously dented our credibility.
A growing consensus of analysts and informed commentators have criticized both the EU’s handling of the growing sovereign crisis in the Euro area as well as its proposed plans for future reform supposedly designed to prevent a recurrence of this crisis. There is an urgent need to change course.
Our latest paper (download here) offers several new suggestions on how best to 1) institutionalize a successful and credible crisis management response in the EU in the short and long term 2) improve the existing European Financial Stability Facility 3) construct a permanent European Stabilization Mechanism.