This week, Project Syndicate catches up with Lucrezia Reichlin, a former director of research at the European Central Bank.
Project Syndicate: In March, you wrote that, to counter the economic consequences of the COVID-19 pandemic, the eurozone needs a “coordinated fiscal stimulus that takes advantage of its joint-financing power,” managed by a powerful new crisis-management mechanism. In an ideal world, what would such an “insurance fund” look like? If, in practice, it proves to be a political non-starter, as it did after the euro crisis a decade ago, are there ways to repurpose existing institutions to manage a fiscal response today?
Lucrezia Reichlin: The eurozone is facing a fundamental policy asymmetry: the monetary authority is federal, whereas fiscal policies are national. In crises, the European Central Bank plays a disproportionate role in the adjustment. This is ineffective, especially when interest rates are at their effective lower bound. And it may lead the ECB to do too much, raising questions about its legitimacy, as exemplified by the German Federal Constitutional Court’s recent ruling against the ECB’s pre-pandemic asset-purchase program.
A shared fiscal mechanism would reduce vulnerability to sovereign risk in debt issuance, and help to ease the constraint on using fiscal accommodation to respond to large shocks. In an ideal world, this could be achieved by a stabilization fund issuing non-defaultable debt such as Eurobonds or some hybrid instrument backed by a pool of eurozone sovereign bonds.
There are various ways such a fund could be designed; but, fundamentally, it would require a degree of risk-sharing that national governments are not yet prepared to accept. This is understandable: a higher degree of political union would be essential for such a fiscal mechanism to have the needed legitimacy. So, for now, there is little chance that it will be implemented.
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We ask all our Say More contributors to tell our readers about a few books that have impressed them recently. Here are Reichlin's picks:
by Jonathan A. Rodden
Historically, fiscal federalism has had widely diverging results, with some countries doing well and others facing disaster. This book examines those differences, and, by illuminating the complex relationship between institutions and outcomes, provides valuable insights for the debate about the future of Europe.
by Vaclav Smil
An impressive multidisciplinary endeavor, this fascinating book combines economics, sociology, demography, and biology to provide a comprehensive view of growth in nature and society. In doing so, it highlights the limits of economic perspectives on growth.
by Robert Skidelsky
Understanding the relationship between money and government is essential to grasping the relationship between monetary and fiscal policy. Skidelsky brings history and theory to bear on the question, emphasizing the role of power in shaping economic ideas, reminding us that those ideas can be understood only in historical context.
From the PS Archive
Reichlin cautioned, amid a surge in EU optimism, that the bloc’s future depends on eurozone fiscal reform. Read more.
Reichlin urged closer policy coordination to prevent a cyclical growth slump from becoming a full-blown eurozone crisis. Read more.
Around the web
Last November, Reichlin drew upon her experience as a central banker to show why monetary policy could not be expected to address the combination of low inflation, low growth, and record-low interest rates in the eurozone. Watch the interview.