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The Euro crisis and the new impossible trinity. Bruegel Policy Contribution 2012/01, January 2012

Pisani-Ferry, Jean (2012) The Euro crisis and the new impossible trinity. Bruegel Policy Contribution 2012/01, January 2012. [Policy Paper]

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    Abstract

    The search for solutions to the euro crisis is based on a partial diagnosis that overemphasises the lack of enforcement of existing fiscal rules. Europe’s leaders should rather address the euro area’s inherent weaknesses revealed by the crisis. At the core of euro-area vulnerability is an impossible trinity of strict no-monetary financing, bank-sovereign interdependence and no co-responsibility for public debt. This Policy Contribution assesses the corresponding three options for reform: a broader European Central Bank (ECB) mandate, the building of a banking federation, and fiscal union with common bonds. None will be easy. The least feasible option is a change to the ECB’s mandate; changing market perceptions would require the ECB to credibly commit overwhelming forces, and the ECB is simply not in a position to make such a commitment. The building of a banking federation, meanwhile, involves reforms that are bound to be difficult. Incremental progress is likely, but a breakthrough less so. This leaves fiscal union. It faces major obstacles, but a decision to move in this direction would signal to the markets and ECB a commitment to stronger Economic and Monetary Union. One possibility would be to introduce a limited, experimental scheme through which trust could be rebuilt.

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    Item Type: Policy Paper
    Subjects for non-EU documents: EU policies and themes > Policies & related activities > economic and financial affairs > EMU/EMS/euro
    EU policies and themes > Policies & related activities > economic and financial affairs > financial crisis 2008-on and consequences/reforms
    Subjects for EU documents: UNSPECIFIED
    EU Series and Periodicals: UNSPECIFIED
    EU Annual Reports: UNSPECIFIED
    Series: Series > Bruegel (Brussels) > Policy Contributions
    Depositing User: Phil Wilkin
    Official EU Document: No
    Language: English
    Date Deposited: 16 Jan 2012 13:59
    Number of Pages: 16
    Last Modified: 16 Jan 2012 13:59
    URI: http://aei.pitt.edu/id/eprint/33333

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