Restoring Credible Economic Governance to the Eurozone

16 Pages Posted: 7 Feb 2013

Date Written: February 2013

Abstract

This paper discusses new institutional rules for a stable and lasting European Monetary Union (EMU). We propose a return to a strict and sustainable economic governance framework, which is mainly driven by market forces within a smart rule‐based environment. Our recommendations are: (a) ex ante conditionalities with a tough monitoring process to avoid moral hazard in the future; (b) further enhancement of the Stability and Growth Pact; and (c) ultimo ratio punishment to be able to respond to the unique constellation of fiscal–monetary interaction and new rescue facilities. Countries violating fiscal rules for more than four years in a row will thus lose their fiscal sovereignty or will have to resign from the Eurozone. After fulfilling the ex ante conditionalities as well as all required criteria, the country either will recover its fiscal sovereignty, or, in case of exclusion, will be given the option to rejoin EMU under certain conditions.

Keywords: economic governance, monetary union, Stability and Growth Pact

JEL Classification: F33, F34, F36, H63, H81

Suggested Citation

Hengstermann, Katja, Restoring Credible Economic Governance to the Eurozone (February 2013). Economic Affairs, Vol. 33, Issue 1, pp. 2-17, 2013, Available at SSRN: https://ssrn.com/abstract=2213134 or http://dx.doi.org/10.1111/ecaf.12009

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