Eurozone Watch

After weeks of contradictory statements on the question how to handle Greece, the Heads of State and Government of the EU member states used their informal European Council meeting on February 11^th  for a strong political signal that aimed at calming markets and giving political support to the Greek Prime Minister’s budgetary consolidation efforts and structural reform programme. The subsequent meeting of the EU’s Finance Ministers on February 16^th meanwhile increased pressure on the Greek government for further consolidation, taking the Excessive Deficit Procedure to its next step in which the Finance Ministers issue precise recommendations for Greece and increase surveillance in the country.

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In our new contribution for Project Syndicate, we argue that the European Monetary Union needs a new stability pact which limits not government budgets, but imbalances in the current accounts of the member states. In such a pact, both deficit and surplus countries would be required to use their fiscal and general economic policies to strive for a rebalancing. If countries are uncooperative, they would be fined. In this way, dangerous trends of external indebtness for single countries can be limited as well as excessive beggar-thy-neighbor policies through revaluation limited.

Read the full column at the Project Syndicate Website here.

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For a few weeks now, the debate about whether a bail out of an EMU country is a likely option has accelerated. A few days after we had argued in a syndicated piece for Project Syndicate which was printed by a number of papers across the world that the no-bail-out clause has no relevance in the current crisis and EU member states would bail out a EMU member with solvency or liquidity problems. Germany’s Finance Minister recently added flavour to the debate. Only yesterday, it was reported that Steinbrück confirmed that EMU countries might bail-out a fellow euro-area country (read for instance Bloomberg on this).

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