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Living (dangerously) without a fiscal union. Bruegel Working Paper 2015/03

Mody, Ashoka (2015) Living (dangerously) without a fiscal union. Bruegel Working Paper 2015/03. [Working Paper]

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    Abstract

    The euro area’s political contract requires member nations to rely principally on their own resources when confronted with severe economic distress. Since monetary policy is the same for all, national fiscal austerity is the default response to counter national fiscal stress. Moreover, the monetary policy was itself stodgy in countering the crisis, and banking-sector problems were allowed to fester. And it was considered inappropriate to impose losses on private sector creditors. Thus, the nature of the incomplete monetary union and the self-imposed taboos led deep and persistent fiscal austerity to become the norm. As a consequence, growth was hurt, which undermined the primary objective of lowering the debt burden. To prevent a meltdown, distressed nations were given official loans to repay private creditors. But the stress and instability continued and soon it became necessary to ease the repayment terms on official loans. When even that proved insufficient, the German-inspired fiscal austerity was combined with the deep pockets of the European Central Bank. The ECB’s safety net for insolvent or near-insolvent banks and sovereigns, in effect, substituted for the absent fiscal union and drew the central bank into the political process.

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    Item Type: Working Paper
    Subjects for non-EU documents: EU policies and themes > Policies & related activities > economic and financial affairs > monetary policy
    EU policies and themes > Policies & related activities > economic and financial affairs > financial crisis 2008-on/reforms/economic governance
    Subjects for EU documents: UNSPECIFIED
    EU Series and Periodicals: UNSPECIFIED
    EU Annual Reports: UNSPECIFIED
    Series: Series > Bruegel (Brussels) > Working Papers
    Depositing User: Phil Wilkin
    Official EU Document: No
    Language: English
    Date Deposited: 27 Mar 2015 12:52
    Number of Pages: 34
    Last Modified: 27 Mar 2015 12:52
    URI: http://aei.pitt.edu/id/eprint/62983

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