Dealing with the eurozone debt crisis: A proposal for reform

The Eurozone faces a fourfold challenge: (1) fiscal support: to provide a credible mechanism for supporting countries with high and rapidly rising national debt and high borrowing costs; (2) fiscal responsibility: to ensure that all member states of the Eurozone credibly commit to sustainable levels of national debt; (3) fiscal autonomy: to permit each member state to determine its own fiscal policy; and (4) counter-cyclical fiscal policy: to allow each member state to pursue fiscal stabilization policy, stimulating the economy in a recession and dampening it in a boom. We outline a proposal for meeting these challenges. The paper is organized as follows. First, we summarize the underlying problems. Second, we present the proposal for over-coming these problems. Third, we consider two potentially important extentions of the pro-posal. Fourth, in the context of a simple model, we assess empirically how this proposal could work for the Greek economy. Fifth, we examine the merits of this proposal in relation to other prominent proposals for dealing with the Eurozone crisis. Finally, we conclude by high-lighting the most important implications of the proposal for the Eurozone.