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How to Fix Europe's Monetary Union

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How to Fix Europe's Monetary Union R EBOOTING E U R OPE This eBook collects essays from a broad range of leading economists on a simple question: “What Fixing the Monetary Union Rebooting Europe: more needs to be done to fix the Eurozone?” Although the authors disagree on solutions, there is a broad consensus on the list of needed fixes. These include: • Completing the Banking Union; How to fix Europe’s • Breaking the ‘doom loop’ between banks and their sovereigns; • Ensuring EZ-wide risk sharing for Europe-wide shocks; • Cleaning up the legacy debt problem; monetary union • Coordinating EZ-level fiscal policy while tightening national-level discipline; • Advancing structural reforms for a better functioning monetary union. Views of leading economists Each chapter presents solutions to one or more of these challenges. Taken together, they are the most complete catalogue of solutions to date – representing views that range from calls for sharp increases in European integration to those that favour national, market-based solutions. Edited by Richard Baldwin The authors, drawn from a wide geographic range and all schools of thoughts, are: Thorsten Beck, and Francesco Giavazzi Agnès Bénassy-Quéré, Peter Bofinger, Giancarlo Corsetti, Paul De Grauwe, Barry Eichengreen, Lars Feld, Daniel Gros, Refet Gürkaynak, Matthew Higgins, Yuemei Ji, Sebnem Kalemli-Ozcan, Stefano Micossi, Tommaso Monacelli, Elias Papaioannou, Paolo Pesenti, Jean Pisani-Ferry, Chris Pissarides, André Sapir, Isabel Schnabel, Christoph Schmidt, Guido Tabellini, Volker Wieland, and Charles Wyplosz. ISBN 978-1-907142-96-3 Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX A VoxEU.org Book Tel: +44 (0)20 7183 8801 Fax: +44 (0)20 7183 8820 Email: [email protected] www.cepr.org 9 781907 142963 How to fix Europe’s monetary union: Views of leading economists A VoxEU.org eBook CEPR Press Centre for Economic Policy Research 2nd Floor 33 Great Sutton Street London, EC1V 0DX UK Tel: +44 (0)20 7183 8801 Email: [email protected] Web: www.cepr.org ISBN: 978-1-907142-96-3 © CEPR Press, 2016 How to fix Europe’s monetary union: Views of leading economists A VoxEU.org eBook Edited by Richard Baldwin and Francesco Giavazzi CEPR Press Centre for Economic Policy Research (CEPR) The Centre for Economic Policy Research (CEPR) is a network of over 1000 research economists based mostly in European universities. The Centre’s goal is twofold: to promote world-class research, and to get the policy-relevant results into the hands of key decision-makers. CEPR’s guiding principle is ‘Research excellence with policy relevance’. A registered charity since it was founded in 1983, CEPR is independent of all public and private interest groups. It takes no institutional stand on economic policy matters and its core funding comes from its Institutional Members and sales of publications. Because it draws on such a large network of researchers, its output reflects a broad spectrum of individual viewpoints as well as perspectives drawn from civil society. CEPR research may include views on policy, but the Trustees of the Centre do not give prior review to its publications. The opinions expressed in this report are those of the authors and not those of CEPR. Chair of the Board Sir Charlie Bean President Richard Portes Director Richard Baldwin Research Director Kevin Hjortshøj O’Rourke Policy Director Charles Wyplosz Contents About the contributors vii Foreword xx Introduction 22 Richard Baldwin and Francesco Giavazzi Part 1: Complete reform plans Minimal conditions for the survival of the euro 33 Barry Eichengreen and Charles Wyplosz Maastricht 2.0: Safeguarding the future of the Eurozone 46 Lars P. Feld, Christoph M. Schmidt, Isabel Schnabel and Volker Wieland A sovereignless currency 62 Agnès Bénassy-Quéré The Eurozone’s Zeno paradox – and how to solve it 75 Jean Pisani-Ferry Part 2: Focusing on completing the Banking Union, and financial markets Completing the Banking Union 87 Daniel Gros Safeguarding the euro – balancing market discipline with certainty 99 Thorsten Beck The EZ Crisis: What went wrong with the European financial integration? 107 Sebnem Kalemli-Ozcan Part 3: Focusing on fiscal and monetary policy Building common fiscal policy in the Eurozone 117 Guido Tabellini Rebooting Europe: Closer fiscal cooperation needed 132 Christopher Pissarides How to reboot the Eurozone and ensure its long-term survival 136 Paul De Grauwe and Yuemei Ji Policies and institutions for managing the aggregate macroeconomic stance of the Eurozone 150 Giancarlo Corsetti, Matthew Higgins and Paolo Pesenti Asymmetries and Eurozone policymaking 160 Tommaso Monacelli ECB in Eurozone policymaking: Going forward 176 Refet S. Gürkaynak Part 4: Focusing on structural and institutional reform The Eurozone needs less heterogeneity 179 André Sapir Balance-of-payments adjustment in the Eurozone 188 Stefano Micossi Needed: A European institutional union 207 Elias Papaioannou vi Part 4: Focusing on structural and institutional reform The way forward: Coping with the insolvency risk of member states and giving teeth to the European Semester 227 Peter Bofinger Epilogue: Future history – how the crisis might have been handled How the Euro Crisis was successfully resolved 240 Barry Eichengreen and Charles Wyplosz vii About the contributors Richard Baldwin is Professor of International Economics at the Graduate Institute, Geneva since 1991, a part-time visiting research professor at the University of Oxford since 2012, Director of CEPR since 2014, and Editor-in-Chief of Vox since he founded it in June 2007. He was Co-managing Editor of the journal Economic Policy from 2000 to 2005, Policy Director of CEPR from 2006 to 2014, and Programme Director of CEPR’s International Trade programme from 1991 to 2001. Before that he was a Senior Staff Economist for the President’s Council of Economic Advisors in the Bush Administration (1990-1991), on leave from Columbia University Business School where he was Associate Professor. He did his PhD in economics at MIT with Paul Krugman and has published a half dozen articles with him. He was visiting professor at MIT in 2002/03 and has taught at universities in Australia, Italy, Germany and Norway. He has also worked as consultant for the numerous governments, the Asian Development Bank, the European Commission, OECD, World Bank, EFTA, and USAID. The author of numerous books and articles, his research interests include international trade, globalisation, regionalism, and European integration. Thorsten Beck is Professor of Banking and Finance at Cass Business School in London. He was Professor of Economics and founding chair of the European Banking Center at Tilburg University from 2008 to 2013. Previously he worked in the research department of the World Bank and has also worked as consultant for – among others - the IMF, the European Commission, and the German Development Corporation. His research and policy work has focused on international banking and corporate finance and has been published in Journal of Finance, Journal of Financial Economics, Journal of Monetary Economics and Journal of Economic Growth. His research and policy work has focused on Eastern, Central and Western Europe, Sub-Saharan Africa and Latin America. He is also Research Fellow at CEPR and a Fellow at the Center for Financial Studies in viii How to fix Europe’s monetary union: Views of leading economists Frankfurt. He studied at Tübingen University, Universidad de Costa Rica, University of Kansas and University of Virginia. Agnès Bénassy-Quéré is a Professor at the Paris School of Economics - University of Paris 1 Panthéon Sorbonne, and the Chair of the French Council for Economic Analysis. She worked for the French Ministry of economy and finance, before moving to academic positions successively at Universities of Cergy-Pontoise, Lille 2, Paris-Ouest and Ecole Polytechnique. She also served as a Deputy Director and as a Director of CEPII and is affiliated with CESIfo. She is a Member of the Commission Economique de la Nation (an advisory body to the Finance Minister) and of the Cercle des Economistes, and a columnist at France Culture. She is a former member of the Shadow ECB Council. Her research interests focus on the international monetary system and European macroeconomic policy. Peter Bofinger is Professor for Monetary Policy and International Economics at the University of Wuerzburg, member of the German Council of Economic Experts and a Research Fellow at the Centre for Economic Policy Research (CEPR). He received his doctorate from Saarland University. Previously he was economist at the Bundesbank, visiting scholar at the Federal Reserve Bank of St. Louis and at the IMF, and Professor at the Universities of Kaiserslautern and Konstanz. He is author of textbooks on macroeconomics and monetary economics (Monetary Policy: Goals, Institutions, Strategies, and Instruments) as well as general interest books on economic issues. Giancarlo Corsetti is Professor of Macroeconomics at the University of Cambridge. His main field of interest is international economics and open-economy macro. His main contributions to the literature include models of the international transmission mechanisms and optimal monetary policy in open economies; theoretical and empirical studies of currency and financial crises and their international contagion; models of international policy cooperation and international financial architecture; quantitative and empirical analyses of the multiplier and fiscal policy. He has published articles in many international journals
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