Economic Governance in the Euro Area: Balancing Risk Reduction and Risk Sharing

36 Pages Posted: 3 Nov 2016

Date Written: July 21, 2016

Abstract

The unchecked build-up of imbalances during the 2000s exposed the euro area to the risk of sudden stops. Such risk materialized in 2009-10 and its consequences were amplified by the absence of adequate institutions. Europe embarked on a thorough process of reforming its economic governance. We review the measures taken concerning sovereigns and banks since 2010 and discuss possible ways forward on both fronts. We argue that, while significant progress has been achieved, a lot of ground remains to be covered. In general, reforms have favoured risk reduction over risk sharing. As a result, in the face of exceptional circumstances, the euro area is not equipped with the fiscal tools necessary for macroeconomic stabilization; moreover, banking union lacks common financial backstops. Only further risk (and sovereignty) sharing can avoid harmful pro-cyclical excesses.

Keywords: economic and monetary union, banking union, fiscal union, sovereign risk, prudential regulation, sovereigns-banks nexus

JEL Classification: E58, E62, F42, F45, G28, H63

Suggested Citation

Balassone, Fabrizio and Cecchetti, Sara and Cecioni, Martina and Cioffi, Marika and Cornacchia, Wanda and Corneli, Flavia and Semeraro, Gabriele, Economic Governance in the Euro Area: Balancing Risk Reduction and Risk Sharing (July 21, 2016). Bank of Italy Occasional Paper No. 344, Available at SSRN: https://ssrn.com/abstract=2863885 or http://dx.doi.org/10.2139/ssrn.2863885

Fabrizio Balassone (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Sara Cecchetti

Bank of Italy

Via Nazionale 91
Rome, 00184
Italy

Martina Cecioni

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Marika Cioffi

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

Wanda Cornacchia

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Flavia Corneli

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Gabriele Semeraro

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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