Melitz, J. (2014) “The discontented members of the Eurozone should consider very seriously the creation of a second euro“, LSE EUROPP Blog, 04 September.
Since the height of the Eurozone crisis, a number of reforms have been pursued to stabilise the economic situation in states using the single currency. In an interview with EUROPP’s editor Stuart Brown, Jacques Melitz outlines why the Eurozone is still suffering from two key problems – the European Central Bank’s inability to engage in proper open market operations and the lack of joint-responsibility for the banking system. He argues that, given the inflexibility of Germany, the discontented Eurozone members should give serious consideration to the possibility of creating a ‘second euro’ as an alternative.
Although the initial crisis has been alleviated to some extent, there are still substantial difficulties within the Eurozone. Do we require more radical reforms of the single currency than have already been implemented?
There are two major problems. The first problem is the European Central Bank’s inability to engage in proper open market operations: the kind of open market operations which are discussed in textbooks, where the central bank just buys or sells at its own initiative. This power does not exist under the Maastricht Treaty – there are so-called open market operations, but they refer to refinancing operations of banks that depend on the banks’ willingness to lend to their customers, and in some special cases they refer to purchases of securities of particular governments in difficulty andwhich then have to be sterilised. So basically we have a European Central Bank which can’t engage in ordinary open market operations. This is a very great defect.
The other problem is that there’s no joint-responsibility for the solvency of the banking system. It’s true that some movement has been made in this direction with respect to the proposed Banking Union, however this has not gone nearly far enough. It simply involves the introduction of common rules and common supervision, but there has been no establishment yet of the essential Single Bank Resolution Fund under discussion to prop up insolvent banks. So on these two counts we certainly still require some important reforms.
Relevant posts:
- Melitz, J. (2014) “Why Europe Needs Two Euros, Not One“, VoxEU Organisation, 02 July.
- James, H. (2014) “Europe and Anti-Europe“, Project Syndicate, 27 May.