Skip to main content

Cookies and Privacy

We use cookies to improve your experience on our website. To find out more, read our updated Cookie policy, Privacy policy and Terms & Conditions

31815c0246f86f780f7e0b01_px1250c.jpg

An External Stability Pact for Europe

Given the increasingly close financial and economic links between euro-zone members, rising government debt in even one EMU country can have serious consequences for all members, because no member will let another default. Therefore, private-sector debt should also be monitored within the EMU’s surveillance framework.

BERLIN – The current economic crisis has exposed two fundamental problems in the design of the European Monetary Union. The first concerns the sustainability of public finances in a number of euro-zone member states. Second, inadequate macroeconomic policy coordination has resulted in divergences in the international competitiveness of euro-zone members, threatening the very existence of the euro.

Countries whose public finances seemed fundamentally sound as late as last year have come under severe fiscal pressure. Ireland’s government debt is expected to rise to almost 80% of GDP by 2010, whereas just a year ago the European Commission projected that Ireland’s government debt would be below 30% of GDP. Likewise, whereas Spain was expected to decrease its debt ratio, its debt-to-GDP ratio is now likely to double between 2007 and 2010, to more than 60%.

The EU’s fiscal surveillance mechanisms failed to predict these developments because they neglect a crucial variable: the dynamics of private-sector debt. Given the high economic costs of a banking crisis, governments are likely to take on the liabilities of their financial sector when a crisis hits – as recently occurred in the United Kingdom and Ireland, and in financial crises in Latin America and Asia in the 1990’s. The same is probably true when key business sectors near insolvency. A country with sound public finances can thus become a fiscal basket case practically overnight.

We hope you're enjoying Project Syndicate.

To continue reading, subscribe now.

Subscribe

Get unlimited access to PS premium content, including in-depth commentaries, book reviews, exclusive interviews, On Point, the Big Picture, the PS Archive, and our annual year-ahead magazine.

https://prosyn.org/yVCOCfw;
  1. marin8_Bernd von Jutrczenkapicture alliance via Getty Images_germanyfinanceminister Bernd von Jutrczenka/picture alliance via Getty Images

    Germany Can Reduce Its External Surplus

    Dalia Marin

    For years, Germany's ballooning current-account surplus has rankled the rest of the world, and German policymakers have thrown up their hands as if powerless to do anything about it. But the external imbalance is a result of policies that are fully within the government's power to change.

    0
  2. op_campanella7_Aurelien MeunierGetty Images_billgatesrichardbransonthumbsup Aurelien Meunier/Getty Images

    Abolish the Billionaires?

    Edoardo Campanella

    Even many of the wealthiest Americans would agree that the United States needs to overhaul its tax policies to restore a sense of social justice. But, notes Edoardo Campanella, Future of the World Fellow at IE University's Center for the Governance of Change, such reforms would not be enough to restart the engines of social mobility and promote greater equality of opportunity.

    11