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Towards a fiscal union for the Eurozone

Allard, Céline,  Bluedorn,  John C, (2016), “Towards a fiscal union for the Eurozone”, Voxeu, 22 Απριλίου

European fiscal rules were too loosely implemented to ensure that public finances were managed appropriately across the cycle in member states. Weak fiscal policies in some countries before the crisis left them ill prepared when adverse shocks manifested. Windfalls from lower interest and debt payments were not saved, higher revenues generated by unsustainable domestic demand booms were wrongly deemed permanent, and in some cases, the shocks themselves were the result of idiosyncratic policies (for example, in Greece). Widespread optimism about the region’s growth prospects at the euro’s inception blunted markets’ scrutiny of national fiscal policies and fueled the rapid convergence of sovereign borrowing costs before the crisis. Furthermore, the so-called ‘no bailout’ clause codified in the European treaties was not credible. With few automatic mechanisms in place to support individual members in distress ex ante, markets extrapolated that crises in affected countries and spillovers to others would be deep enough for policymakers to prefer to bail out a member country ex post rather than let it default. In other words, market discipline failed ex ante because the no-bailout option was not ex post credible.

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