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The Euro crisis and the new impossible trinity

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  • Jean Pisani-Ferry

Abstract

The search for solutions to the euro crisis is based on a partial diagnosis that overemphasises the lack of enforcement of existing fiscal rules. Europe’s leaders should rather address the euro area’s inherent weaknesses revealed by the crisis.At the core of euro-area vulnerability is an impossible trinity of strict no-monetary financing, bank-sovereign interdependence and no co-responsibility for public debt. This Policy Contribution assesses the corresponding three options for reform - a broader European Central Bank (ECB) mandate, the building of a banking federation, and fiscal union with common bonds. None will be easy.The least feasible option is a change to the ECB’s mandate; changing market perceptions would require the ECB to credibly commit overwhelming forces, and the ECB is simply not in a position to make such a commitment.The building of a banking federation, meanwhile, involves reforms that are bound to be difficult. Incremental progress is likely, but a breakthrough less so.This leaves fiscal union. It faces major obstacles, but a decision to move in this direction would signal to the markets and ECB a commitment to stronger Economic and Monetary Union. One possibility would be to introduce a limited, experimental scheme through which trust could be rebuilt.This Policy Contribution draws on presentations made at the XXIV Moneda y Crédito Symposium, Madrid, 3 November 2011, at the Asia-Europe Economic Forum conference in Seoul, 9 December, and at De Nederlandsche Bank in Amsterdam on 17 December. I am very grateful to Silvia Merler for excellent research assistance. I thank participants in these seminars and Bruegel colleagues for comments and criticisms.

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  • Jean Pisani-Ferry, 2012. "The Euro crisis and the new impossible trinity," Policy Contributions 674, Bruegel.
  • Handle: RePEc:bre:polcon:674
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    Cited by:

    1. Allegret, Jean-Pierre & Raymond, Hélène & Rharrabti, Houda, 2017. "The impact of the European sovereign debt crisis on banks stocks. Some evidence of shift contagion in Europe," Journal of Banking & Finance, Elsevier, vol. 74(C), pages 24-37.
    2. Ritzen, Jo & Haas, Jasmina, 2016. "A Sustainable Euro Area with Exit Options," IZA Policy Papers 120, Institute for the Study of Labor (IZA).
    3. Catherine Mathieu & Henri Sterdyniak, 2013. "The euro area in crisis," Sciences Po publications info:hdl:2441/2k5dq3ilav9, Sciences Po.
    4. Jaroslav Vostatek, 2014. "Tax Treatment of Public and Private Pensions," ACTA VSFS, University of Finance and Administration, vol. 8(1), pages 7-27.
    5. Tomas Klinger & Petr Teply, 2016. "The Nexus Between Systemic Risk and Sovereign Crises," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 66(1), pages 50-69, February.
    6. De Grauwe, Paul & Foresti, Pasquale, 2016. "Fiscal rules, financial stability and optimal currency areas," Economics Letters, Elsevier, vol. 145(C), pages 278-281.
    7. Stijn Claessens, 2017. "Global Banking: Recent Developments and Insights from Research," Review of Finance, European Finance Association, vol. 21(4), pages 1513-1555.
    8. Dejan Šoškić, 2015. "Global Financial Reform Since 2008: Achievements and Shortcomings," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 62(3), pages 385-400, June.
    9. Joshua Aizenman, 2012. "The Euro and the global crises: finding the balance between short term stabilization and forward looking reforms," NBER Working Papers 18138, National Bureau of Economic Research, Inc.
    10. Joshua Aizenman & Gunnar Gunnarsson, 2015. "Fiscal Challenges in Multilayered Unions: An Overview and Case Study," Social Sciences, MDPI, Open Access Journal, vol. 4(2), pages 1-20, May.
    11. Tomáš Klinger & Petr Teply, 2014. "Modelling Interconnections in the Global Financial System in the Light of Systemic Risk," ACTA VSFS, University of Finance and Administration, vol. 8(1), pages 64-88.
    12. van Riet, Ad, 2015. "Market-preserving fiscal federalism in the European Monetary Union," MPRA Paper 77772, University Library of Munich, Germany.
    13. Klaus Abberger & Biswa Nath Bhattacharyay & Chang Woon Nam & Gernot Nerb & Siegfried Schönherr, 2014. "How Can the Crisis Vulnerability of Emerging Economies Be Reduced?," ifo Forschungsberichte, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 65, June.
    14. Niels Gilbert & Jeroen Hessel & Silvie Verkaart, 2013. "Towards a Stable Monetary Union: What Role for Eurobonds?," DNB Working Papers 379, Netherlands Central Bank, Research Department.
    15. Rosaria Canale, 2015. "Capital flows, long term bond yields and fiscal stance: the Eurozone policy trilemma," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 14(1), pages 31-44, December.
    16. de Haan, Leo & Hessel, Jeroen & van den End, Jan Willem, 2014. "Are European sovereign bonds fairly priced? The role of modelling uncertainty," Journal of International Money and Finance, Elsevier, vol. 47(C), pages 239-267.
    17. David Tison, 2014. "Impact of Non-cooperative Oligopoly of the Banking System on Its Pro-cyclicality in the Czech Republic," ACTA VSFS, University of Finance and Administration, vol. 8(1), pages 47-63.
    18. Pisani-Ferry, Jean, 2013. "The known unknowns and unknown unknowns of European Monetary Union," Journal of International Money and Finance, Elsevier, vol. 34(C), pages 6-14.
    19. Merler, S. & Pisani-Ferry, J., 2012. "Hazardous tango: sovereign-bank interdependence and financial stability in the euro area," Financial Stability Review, Banque de France, issue 16, pages 201-210, April.
    20. Tomas Pavlicek, 2014. "The Developmnet of the Self-employed Sector in the Czech Republic in the Years 2006 - 2010," ACTA VSFS, University of Finance and Administration, vol. 8(1), pages 28-46.
    21. Stephan Schulmeister, 2013. "The European Monetary Fund. A systemic problem needs a systemic solution," Revue de l'OFCE, Presses de Sciences-Po, vol. 0(1), pages 389-424.
    22. Rosaria Rita Canale & Paul Grauwe & Pasquale Foresti & Oreste Napolitano, 2018. "Is there a trade-off between free capital mobility, financial stability and fiscal policy flexibility in the EMU?," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 154(1), pages 177-201, February.
    23. Gómez-Puig, Marta & Sosvilla-Rivero, Simón, 2013. "Granger-causality in peripheral EMU public debt markets: A dynamic approach," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4627-4649.
    24. Mariarosaria Comunale & Jeroen Hessel, 2014. "Current account imbalances in the Euro area: Competitiveness or financial cycle?," DNB Working Papers 443, Netherlands Central Bank, Research Department.

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