Reforming the Euro Pragmatically: Towards Sustainable Fiscal Policy and a Revamped Eurosystem

The conflicting standpoints on reforming the euro are creating more controversies than practical results. Mistrust between the participants led to short-sighted fiscal discipline that has amplified the economic disturbances. Expert analysis on the proposed reforms is often deficient as the potential of conducting policies under the existing institutional features is not adequately analysed. This shortcoming notably concerns the functions of the Eurosystem. In the present article, reforming the euro successfully calls for a convincing high-level commitment to preserve the euro also in unexpected circumstances and pragmatic improvements in its key functions. In fiscal policy the focus should be shifted to long-term sustainability. The tasks of the Eurosystem to promote the smooth operation of the payment systems at all times and to function as the lender of last resort to solvent governments should be confirmed. Adequate smoothing of short-term asymmetric shocks can be based on the automatic stabilisers in national budgets, possibly accompanied by a specific mechanism with a clause to strictly prevent permanent transfers. Public finances should be directed to mitigating climate change and saving energy. The EU should take a leading role globally in meeting these long-term challenges.