IDEAS home Printed from https://ideas.repec.org/p/iie/pbrief/pb10-14.html
   My bibliography  Save this paper

In Defense of Europe's Grand Bargain

Author

Listed:
  • Jacob Funk Kirkegaard

    () (Peterson Institute for International Economics)

Abstract

The current European economic crisis is principally fiscal in nature. During the weekend of May 8-9, 2010, European leaders crafted a very important and constructive political "grand bargain" between EU member states and the European Central Bank (ECB) with far reaching, positive implications for the credibility of the European Union's fiscal policy framework and the long-term sustainability of European government finances. There is no chance that the eurozone will break up as a result of the current economic crisis and in the long term from the effects of the grand bargain. Leaving the euro will come at catastrophic cost to any nation that tries to do so out of economic weakness. If Greece is ultimately forced to default on its debts, it is certain the Greek government would want to do it within the eurozone. As such, a Greek default poses no risk to the composition of the eurozone, which considering that a German departure is equally unlikely is a secure monetary union. Kirkegaard suggests a set of required next steps for Europe: (1) European governments must immediately begin to address the lingering uncertainties surrounding the capital adequacy of the eurozone banking system; (2) it is crucial that eurozone governments, particularly among the Southern members, deliver expeditiously on the austerity and not least structural reform commitments recently made; and (3) the eurozone should consider introducing a potential "carrot" for members that successfully manage to put their government finances on a sustainable path. This carrot could come in the form of a future common "Maastricht bond," similar to the often suggested "eurobond," but open only to eurozone member s that actually adhere to the Maastricht Treaty debt stock criteria of a maximum level of government debt of 60 percent over an entire business cycle. A successfully launched pan-European Maastricht bond, backed by the credibility of years of painfully endured austerity measures across a sufficient number of participating member states, could achieve a scale and market depth not far off today's US treasury market. A Maastricht bond could consequently pose the first serious threat to an increasingly fragile US treasury market as the "global safe haven" asset.

Suggested Citation

  • Jacob Funk Kirkegaard, 2010. "In Defense of Europe's Grand Bargain," Policy Briefs PB10-14, Peterson Institute for International Economics.
  • Handle: RePEc:iie:pbrief:pb10-14
    as

    Download full text from publisher

    File URL: https://piie.com/publications/policy-briefs/defense-europes-grand-bargain
    Download Restriction: no

    References listed on IDEAS

    as
    1. Ana M. Aizcorbe, 2002. "Price measures for semiconductor devices," Finance and Economics Discussion Series 2002-13, Board of Governors of the Federal Reserve System (U.S.).
    2. Neves Sequeira Tiago, 2003. "High-Tech Human Capital: Do the Richest Countries Invest the Most?," The B.E. Journal of Macroeconomics, De Gruyter, vol. 3(1), pages 1-28, September.
    3. C.J. Krizan & John Haltiwanger & Lucia Foster, 2002. "The Link Between Aggregate and Micro Productivity Growth: Evidence from Retail Trade," Working Papers 02-18, Center for Economic Studies, U.S. Census Bureau.
    4. Ana M. Aizcorbe & Kenneth Flamm & Anjum Khurshid, 2002. "The role of semiconductor inputs in IT hardware price decline: computers vs. communications," Finance and Economics Discussion Series 2002-37, Board of Governors of the Federal Reserve System (U.S.).
    5. Lori G. Kletzer & Robert E. Litan, 2001. "A Prescription to Relieve Worker Anxiety," Policy Briefs PB01-02, Peterson Institute for International Economics.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Patrick Leblond, 2011. "The Global Financial Crisis and the European Integration Project," CIRANO Working Papers 2011s-55, CIRANO.
    2. Carfì, D. & Magaudda, M. & Schilirò, D., 2010. "Coopetitive game solutions for the eurozone economy," MPRA Paper 26541, University Library of Munich, Germany.
    3. Jacob Funk Kirkegaard, 2010. "How Europe Can Muddle Through Its Crisis," Policy Briefs PB10-27, Peterson Institute for International Economics.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:iie:pbrief:pb10-14. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Peterson Institute webmaster). General contact details of provider: http://edirc.repec.org/data/iieeeus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.