Two mechanisms to prevent a possible EMU crisis
ADEMU (A Dynamic Economic and Monetary Union) touches upon a very wide spectrum of issues: how to ensure the long-term stability of the European Monetary Union (EMU), how to best build defences against economic shocks, and how to manage interdependence in the euro area. In just three years, their research teams documented the EMU’s flaws and came up with innovative solutions at a pivotal moment in EU history. There is no denying that these last three years have been troublesome. They saw the release of the Five Presidents Report on the EMU Roadmap, Brexit, the banking closure in Greece and the end of its ESM-led financial assistance programme, as well as the rise of Eurosceptic parties in several Member States. This, along with the countermeasures deployed by the EU, made for invaluable research material. “The 21st century crises have been a major lesson on how monetary, fiscal, financial and social factors interact in advanced heterogeneous societies, and in the case of the euro area, in a monetary union. They put existing theories into question and provided new data,” says Ramon Marimon, Professor of Economics at the European University Institute and coordinator of ADEMU. An important part of the ADEMU team’s work consisted in helping elucidate these interactions, whereas previous work was either studying these factors separately or not accounting for the heterogeneous internal nature of macroeconomic factors. This allowed the team to better understand how a financial crisis can turn into socio-economic recessions, as well as the causes and effects of sovereign debt crises. The end game was to help design more resilient policies and institutions. The project’s two main proposals – the creation of a European Stability Fund (ESF) for the EMU and a European Unemployment Insurance System (EUIS) for the euro area – are hoped to help avoid a new crisis. “Both are proposals which can be implemented in the current situation without the need to achieve better convergence within the EU or to revise the EU Treaties. They will enhance risk-sharing whilst avoiding permanent transfers,” Prof. Marimon explains. The EUIS surpasses existing unemployment insurance systems and provides better cohesion for the European labour market. The ESF, on the other hand, reconciles two fundamentally opposed views: one that calls for greater risk-sharing within the EU, and one that sees such risk-sharing as counterproductive in light of the inadequate domestic fiscal policies and banking oversight posing these risks. This long-term contract will support the implementation of countercyclical fiscal policies, help confront severe crises as well as face the legacy debt and create euro-area safe assets. These are, according to Prof. Marimon, the four main problems currently being faced by the EMU. “Our work enabled us to identify the three roots of the expansion-crisis-recession sequence,” says Prof. Marimon. “The first one emerges when growth expansion has weak fundamentals or leads to important imbalances. The second one is seen when no proper countercyclical fiscal policies are in place, and the third one – the role of expectations – may lead to multiple socio-economic equilibria and recessions, which could have been prevented with proper policies.” Essentially, ADEMU pinpoints some of the political deadlocks slowing down the development of the EMU, and highlights how they can be overcome with proper policy and institutional design. It offers a path forward for the euro area that should inspire EU decision-makers for the years to come.
Keywords
ADEMU, economic crisis, EMU, Five Presidents Report, European Stability Fund, European Unemployment Insurance System