Luxembourg - commitment and energy are much currently is devoted to institutionalize a crisis management mechanism for the euro area. This is a good and important goal. But a far more significant challenge - largely in the accompanying debate - is the need for crisis prevention.
EU pre-Christmas Summit of agreed European Heads of State and Government in principle the Luxembourg established European financial stability facility (EFSF), which was thrown almost overnight in May 2010 together with a new, permanent European stability mechanism in 2013 to replace. This decision - and the speed with which it reached - reflects the insight that institutional framework of the euro area remains incomplete, until there is a clear rules for dealing with financial crises.
But, while it is clear that the eurozone is solid and well equipped quarantine of wards it once again should be hit by financial contagion, a lot is a vaccine to prevent the infection would be more effective. Unfortunately receives little attention in the political arena will develop.
The starting point should be the weakness of the euro area rules and regulations. Monetary Union is the lack of a common State, despite the single currency. The euro architects were well aware that participating States maintaining sound public finances was essential for the stability of the new currency. A compromise was reached with the stability and Growth Pact the fiscal soundness of the sovereign States to quantify (SWP) and its regulations for compliance with the Maastricht criteria, wanted without actually interrupting their budgets and tax policy.
We now know that was a poor compromise. There was a lack of political will to make a clear commitment illustrated by the weakening of the stability and Growth Pact to a stability-oriented fiscal policy at the behest of Germany and France in 2005. And individual euro area countries have even the discipline neglected since, in the weakened version of the Pact required to observe. Indeed there was nearly a hundred injuries of the stability and Growth Pact's deficit ceiling (3% of GDP) since the euro was introduced and all gone unpunished.
Given this violation of the SGP's deficit repeated requests, along with a similar lack of commitment to the Pact debt limit (60% of GDP), that the punishment for some countries from the markets came it is hardly surprising. The debt crisis in the euro area has highlighted the unwillingness or inability politician, a fiscal policy compatible with maintaining the stability criteria. Instead the long-term objectives as well as the sustainability of public finances have been sacrificed for short-term promise of electoral success.
This implies the need to separate the public debt management in the euro area short-term electoral restrictions. What is needed is a greater emphasis on automatic penalties for fiscal profligacy and overindebtedness than in the EU current proposal include reforms.
It's early counter all well and good to economic problems, as the action plan which promises Commission, but it is to start time when tax distortions actually not threaten. Such distortions are prefixed with usually a bunch of macroeconomic imbalances. For a while may is booming or overheating property markets and a thriving, but excessive banking industry pretend a gradual loss of competitiveness and the risks to the sustainability of public finances, such as in the euro area has occurred. Only if it was too late came seemingly fixed national budgets under considerable pressure.
Effective prevention must begin when adverse economic trends emerge. An independent panel of experts that publicly calls Member States their macroeconomic course – failed to correct objective and understandable indicators, such as ULC - in this respect an important contribution.
Of course, Europe's political class like proposals like this not because they contain does not have a measure of national sovereignty. Finally the public finances of a large competency of politics are.
But would this loss through greater solidarity in the event of a crisis be compensated? It is worth noting that sovereignty's defenders never complained when the euro of their countries brought low inflation and interest rates of most stable predecessors currencies of the euro in exchange for handing over their monetary policy powers to the European Central Bank. A stable currency and sound public finances are two sides of same coin – that's just how it is.
Whether to extend the institutions in a way that recent experience gives us the the probability that a new crisis is significantly reduced. This means improved rules and regulations, placing the emphasis on crisis prevention as on crisis management.
Those who not willing to pay tacitly accept the prize of handover of sovereignty in some areas, a new crisis is only a matter of time. If it does quarantine of wards will be better poor consolation.
Yves Mersch is Governor of the Central Bank of Luxembourg and member of the Governing Council of the European Central Bank. Copyright: project syndicate, 2011.
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