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Euro Zone Crisis and EU Governance: Tackling a Flawed Design and Inadequate Policy Arrangements

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  • Daniel Daianu

Abstract

This paper focuses on roots of strain in the European Monetary Union (EMU). It argues that there is need for a thorough reform of the governance structure of the Union in conjunction with radical changes in the regulation and supervision of financial markets. Financial intermediation has gone astray in recent decades and entailed a big bubble in the industrialized world. Waves of financial deregulation have enhanced systemic risks, via speculative behavior and growing inter-connectedness. Moreover, the EMU was sub-optimal from its debut and competitiveness gaps did not diminish against the backdrop of its inadequate policy and institutional design. The euro zone crisis is not related to fiscal negligence only; over-borrowing by the private sector and poor lending by banks, as well as a one-sided monetary policy, also explain this debacle. The EMU needs to complement its common monetary policy with solid fiscal/budget underpinnings. Fiscal rules and sanctions are necessary, but not sufficient. A common treasury (a federal budget) is needed in order to help the EMU absorb shocks and forestall confidence crises. A joint system of regulation and supervision of financial markets should operate. Emergency measures have to be comprehensive and acknowledge the necessity of a lender of last resort; they have to combat vicious circles. Structural reforms and EMU level policies are needed to enhance competitiveness in various countries and foster convergence. The EU has to work closely with the US and other G20 members in order to achieve a less unstable global financial system.

Suggested Citation

  • Daniel Daianu, 2012. "Euro Zone Crisis and EU Governance: Tackling a Flawed Design and Inadequate Policy Arrangements," CASE Network Studies and Analyses 433, CASE-Center for Social and Economic Research.
  • Handle: RePEc:sec:cnstan:0433
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    File URL: http://www.case-research.eu/upload/publikacja_plik/37398775_CNSA_2012_433.pdf
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    References listed on IDEAS

    as
    1. Jamal Ibrahim Haidar, 2012. "Sovereign Credit Risk in the Eurozone," World Economics, World Economics, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 13(1), pages 123-136, January.
    2. Carmen M. Reinhart & Kenneth S. Rogoff, 2014. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," Annals of Economics and Finance, Society for AEF, vol. 15(2), pages 1065-1188, November.
    3. André Sapir, 2011. "A Comprehensive Approach to the Euro-Area Debt Crisis," ULB Institutional Repository 2013/174297, ULB -- Universite Libre de Bruxelles.
    4. Jürgen von Hagen & Jean Pisani-Ferry & André Sapir & Francois Gianviti & Anne O. Krueger, . "A European mechanism for sovereign debt crisis resolution: a proposal," Blueprints, Bruegel, number 446.
    5. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters,in: This Time Is Different: Eight Centuries of Financial Folly Princeton University Press.
    6. Marek Dabrowski, 2010. "Macroeconomic Surveillance Within the EU," CASE Network E-briefs 13, CASE-Center for Social and Economic Research.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Integration; Financial crisis; EMU; Sovereign debt; Governance reform;

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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