Financial Crisis and Sovereign Debt: The European Union between Risks and Opportunities
Law and Economics Yearly Review, Forthcoming
73 Pages Posted: 7 May 2013
Date Written: July 1, 2012
A key element for understanding the possible developments of the sovereign debt crisis relates to several rounds of non-standard interventions, ranging from the first Security Market Programme to the enhanced Long Term Refinancing Operations, launched by the European Central Bank from May 2010 to March 2012 as a reaction to the exceptional circumstances prevailing in financial markets. In the meantime, the other European institutions prepared and approved a number of legislative changes, intended to enhance the common economic governance and budgetary surveillance. This paper looks at the implications of the “non-standard measures” for the institutional role of the Central Bank in the context of the European Treaty, and examines the new legal acts as instruments to correct and prevent imbalances. The lessons from the Greek case point to more general elements of weakness in the Union, which can only be addressed by an integrated set of significant changes in the EU architecture. Specific attention should be paid to the role played by the rating agencies, and to the opportunity to foresee appropriate supervision by public authorities over them: taking into account that the current regulation seems far from satisfactory, and reforms in line with those enacted in the US would greatly help. The need for solid and sustainable fiscal policies remains key, together with appropriate budgetary and macroeconomic surveillance. The main characteristics to be designed for structured interventions are then described and discussed, with specific regard to the necessary surveillance of the degree of achievement of agreed policies and outcomes, aimed at addressing issues of moral hazard. The Six Pack and the Fiscal Compact Treaty may be seen as important steps in the right direction, but not as definitive solutions. In this context, non-standard interventions – including the ECB measures as well as use of EFSF/ESM fund – cannot go beyond a short-term solution, only temporarily addressing the malfunctioning of securities markets. Their ability to restore an appropriate monetary policy transmission mechanism is linked to successful implementation of other reforms herewith analysed. At a more general level, a change is required toward the observance of rules inspired by social responsibility, properly linked to merit and rigour. All this might result to the approval of new instruments of enhanced integration, not feasible in previous years; or lead, in the opposite case, to critical consequences for the continuity of the Union in its current form.
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