Back to
English Articles
Publié le
Lundi 15 Février 2016
The dramatic episodes in the Eurozone in the past few years called for a number of policy reactions. Yet the response was usually limited to what was deemed indispensable to ensure survival. This column discusses how such half-solutions paved the way for future crises. The author also puts forward a few proposals regarding the Eurozone’s policies. Among them are a European Monetary Fund, an overhaul of surveillance, the completion of banking union, an insolvency procedure for sovereigns, and Eurobonds of some sort. And the sooner such issues are deeply discussed, the faster coherent solutions can be reached.
The Eurozone's Zeno paradox - and how to solve it

Jean Monnet’s famous statement – that Europe will be forged in crises, and will be the sum of the solutions to those crises – was prescient but inaccurate. The truth, for the Eurozone at least, is that Europe today is the sum of a few solutions and many half-solutions. Each of the dramatic episodes of the 2010-2012 period – the Greek call for assistance, the attacks on sovereign debt markets, the Greek insolvency, the feedback loop between sovereigns and banks, the reversal of capital flows, the break-up speculation – sooner or later triggered a policy reaction. Yet, because the member states did not agree on the diagnosis and the priorities, they limited their response to what was deemed indispensable to ensure survival - as clearly expressed by the ultima ratio doctrine. Time and again, half-solutions brought temporary respite but fell short of the structural remedies that would have cured the fragilities revealed by the EZ Crisis. This paved the way for further crises and further responses.

The Eurozone was therefore long caught in its own sort of Zeno’s paradox, until the near-simultaneous announcements of banking union and the ECB’s Outright Monetary Transaction (OMT) scheme, later followed by the announcement of a major monetary stimulus, brought the storm to an end. In retrospect it is clear, however, that neither of these responses completely breaks with the Crisis pattern; absent a common fiscal backstop, banking union remains incomplete, and the OMT would not be able to address potential insolvency in a large country. Zeno’s paradox is still there.

The case for comprehensive reform

The original paradox did not prevent Achilles from overtaking the Tortoise. But as observed by Guiso et al. (2014), politics may prevent the Eurozone from reaching completeness. Disagreements among governments represented the most significant obstacle in the early phases of the Crisis, but governments are not alone anymore: reservations on the side of public opinion are increasingly hampering ambitions for further integration. For this reason the Five Presidents’ report (Juncker et al. 2015) is remarkably elusive about the end-goal. But far from dispelling fears, the absence of a blueprint for the future and the lack of serious discussions about its possible content are in fact fuelling the citizens’ concerns. The perspective of another round of crises that will result in another set of half-solutions is probably the most frightening that can be offered to the citizens.

The euro’s survival currently hinges more on the fear of the dire consequences of a break-up than on the expectation that it will deliver stability and prosperity. This is not a stable equilibrium. To keep the future fuzzy while kicking the can down the road cannot be a winning strategy. Times may not be auspicious for an ambitious agreement, but at least ambitious discussions should be held on alternative blueprints for the future. As things stand, Europe may not be able to reach consensus on a plan for the future of the euro, but it needs a consensus view on issues that must be solved and the alternative options that can be considered.  

Three types of reforms were introduced in response to the euro crisis.

  • First, a crisis management system was put in place, with the creation of the European Stability Mechanism (ESM) and the introduction of the Outright Monetary Transaction (OMT) scheme.
  • Second, a series of new rules and procedures were introduced with the aim of strengthening and broadening the surveillance regime.
  • Third, banking union was initiated.

Crisis management

The creation of a crisis management arrangement was an indispensable addition to the policy system. The policy prescriptions of the Troika have been a matter for controversy, but the conditional financial assistance arrangement has proved effective.

There are questions, however, about its future. The Troika is an ad-hoc association of institutions whose statutes, mandates, and accountability differ significantly. Time has come to create on the basis of the ESM a European Monetary Fund (with seconded staff in time of crisis) that would enjoy more policy autonomy and be accountable to parliament. Assistance decisions should be taken by qualified majority rather than unanimity. Furthermore, the Eurozone should rethink the conditions for assistance. It is not by accident that the IMF has created a range of facilities with different degrees of conditionality whereas the ultima ratio principle precluded it in Europe. Earlier intervention, before a country loses market access, contingent credit lines for prequalified countries and lighter conditionality could save jobs and money.


The piling up of fiscal, economic, and financial surveillance procedures has made the system of policy rules undecipherable even for insiders. For this reason there is little ownership of it among national policymakers, and even less among national parliamentarians – not to speak of public opinions. On the economic front, the Macroeconomic Imbalances Procedures (MIP) has failed to address significant current-account imbalances. On the financial front, the creation of the Single Supervisory Mechanism for banks is a major reform but macroprudential supervision has not delivered much. On the fiscal front the superposition of deficit and debt rules, of nominal and structural benchmarks and of Stability and Growth Pact and TSCG procedures has resulted in extreme complexity. Furthermore, the interpretation clauses recently added by the Commission with the aim of introducing some flexibility in the implementation of the SGP (European Commission 2015a) have added to the opacity of the set of rules. The perceived legitimacy of the policy system is low and the credibility of eventual sanctions remains questionable. There is a growing risk that a government will call the bluff and openly defy the Eurozone’s fiscal rules. 

The question for the future is one of strategy; should the system of rules be strengthened again? Or would discipline be more effective if decentralised? The creation a few years ago of national fiscal councils and the recent Commission proposal for national competitiveness boards (European Commission 2015b) have been first steps in the latter direction. Domestic institutions that are rooted in, and attuned to the national policy system are more likely than rules coming from above to elicit ownership of the disciplines inherent to participating in a currency union. They can also be much more granular in their recommendations, be it as regards budgetary and fiscal decisions or as regards those affecting wage-setting and price formation. They can balance the need for overall policy consistency at Eurozone level and the need for adaptation to specific national contexts.  

The evolution towards decentralisation should be pushed one step further. The remit of the national fiscal councils should first be broadened to encompass issues such as the assessment of tax and expenditures forecasts, the costing of measures submitted to parliament and debt sustainability analysis (some have already been assigned such responsibilities, but not all). Second, governments should be encouraged to rely more on the expertise of these councils, which could be done gradually by granting countries equipped with authoritative institutions more room for manoeuvre within the framework of the Stability and Growth Pact. This would give government an incentive to abide by domestically rooted fiscal discipline principles. Third, these councils should be encouraged to emulate competition authorities and sector-specific regulators, work as a network and develop common methodologies. Although its independence from the Commission and mandate are currently a matter for discussion, the future European Fiscal Board (European Commission 2015c) should function as a hub for this network. The same model would apply to the competitiveness boards.

Read more on VOX


Jean Pisani-Ferry
Anciens auteurs de France Stratégie
Tous nos travaux sur  :