Monday, May 3, 2010

The Euro Crisis

Eurozone map in 2009 Category:Maps of the Eurozone

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By Peter Bofinger

The current Greek crisis has shown all too starkly the limits of the euro zone's sanction and support mechanisms. If the monetary union is to have a future, it needs new rules to keep members in line and bail them out if necessary.

Europe is in the worst crisis of the postwar era. For months, the governments of the European Union member states have proven to be incapable of developing a convincing solution for the serious debt problems of individual countries, as well as for the reduction of imbalances within the monetary union. Uncertainty among investors has grown in recent weeks, which is primarily attributable to the helplessness of political leaders, and only secondarily to the influence of speculators.

The banking crisis of the fall of 2008 demonstrated that bailout packages approved in response to market pressures fail to have the desired effect in the event of a massive crisis of confidence. At the time, it took the comprehensive approach of the Financial Market Stabilization Act to finally bring about stabilization in Germany. Today, the euro zone needs a common strategy that successfully combines sound public finances with solidarity between member states. On the one hand, the member states must be protected against the excesses of the financial markets. On the other hand, steps must be taken to ensure that the solidarity of member states doesn't undermine efforts to achieve fiscal consolidation in individual countries. In other words, what is needed is the appropriate balance of support and requirements.

A European consolidation pact should serve as the basis of the "requirements" part of the equation. It would obligate all member states to formulate a consolidation strategy designed for the medium term, which would determine, based on concrete and publicly verifiable measures, how the return to a largely balanced budget could be achieved. Instead of deficit targets, which are often difficult for politicians to monitor, spending paths and mandatory timetables for tax increases should be established and, if necessary, the criminal code for tax offences should be tightened.

The Euro Crisis

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