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Could the 7+7 report’s proposals destabilise the euro? A response to Guido Tabellini

J. Pisani-Ferry, J. Zettelmeyer, (2018), «Could the 7+7 report’s proposals destabilise the euro? A response to Guido Tabellini», 20 Αυγούστου

In the opening contribution to the VoxEU debate on euro area reform, we and twelve other French and German economists proposed a package of reforms aimed at increasing the stability of the euro area (Bénassy-Quéré et al. 2018). These pursue three objectives: The first is to eliminate the ‘doom loop’ between sovereigns and national banking systems, by combining the introduction of a European deposit insurance with concentration charges forcing banks to diversify their sovereign exposure and exploring the creation of a euro area safe asset.  The second is to improve the resilience of members to adverse shocks, by making European fiscal rules less pro-cyclical and introducing risk sharing mechanisms such as a European unemployment re-insurance.  And the third is to ensure that if all else fails – fiscal rules and common banking supervision in preventing a crisis, and risk-sharing mechanisms in mitigating its blow – the worst that can happen is an orderly debt restructuring inside the euro area, as opposed to a euro area exit.  As with any reform of the euro financial architecture, the benefits and risks of our proposals are not equally shared across members. Common deposit insurance and fiscal risk sharing could, in principle, come at the expense of countries that are less likely to require fiscal support, such as Germany or the Netherlands. Raising the credibility of debt restructuring could raise the borrowing costs of countries with higher debts and sovereign risk spreads, such as Italy or Greece. We attempt to mitigate these problems in two ways: through the design of individual reform proposals, which seek to minimise these risks and ensure that each country’s core interests are respected; and by ensuring that every single euro area country would be amply better off if our proposals were implemented as a package. We also emphasise that the transition to the new regime should be carefully managed – for example, by exempting bonds currently held in bank portfolios from concentration charges.

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