Reassessing the fiscal and monetary framework of EMU

Written by Ramon Marimon on . Posted in Current opinions, Opinions

The Eurozone crisis has been a major stress test for Europe’s Economic and Monetary Union (EMU). Through the crisis and recession, the EMU itself has been tested, as has the resilience of its policies and institutions. Now, in the aftermath of the crisis, Jean Monnet’s quip that Europe is ‘forged in crises’ will be put to the test. Whether or not that happens depends on whether we have learned the lessons of the crisis and, in particular, if there is the political will and wisdom to transform those lessons into improved policies and institutions. Monnet was referring to political decision-makers, but he could have also considered those who must distil the lessons since, after all, social science research nourishes itself in times of crisis.

Ramon Marimon will speak at The State of the Union 2018 about the findings of the ADEMU project.

The Horizon 2020 A Dynamic Economic and Monetary Union (ADEMU) project is an example of that tendency. ADEMU started in June 2015, when the most critical moments of the crisis had already unfolded and just before the EU Five Presidents’ Report was released, providing a roadmap to ‘forge Europe from the euro crisis’.  It was not just a declaration of intentions since, following the 2012 Four Presidents’ Report, some important steps had already been taken. The European Banking Union was starting to take shape, while the European Central Bank (ECB) and the new European Stability Mechanism (ESM) were already playing major roles in resolving the crisis.

Yet a close look at the Presidents’ roadmap and its proposed responses to the crisis raised many questions. Precisely the type of questions that modern macroeconomics and finance study but still are far from providing final answers, it they ever will be. Furthermore, reassessing the fiscal and monetary framework of the EMU also raised interesting legal and political economy issues. Addressing these questions and providing some answers has been the ADEMU research agenda. Now, after three years, the project is reaching its end, and it is time to report its findings and policy proposals. This is the focus of the ADEMU Final Conference, taking place at the European University Institute on 9-10 May 2018, and of the ADEMU sessions at The State of the Union 2018.

ADEMU has been funded by the European Commission’s Horizon 2020 programme, and has been coordinated by the European University Institute with a group of economists and lawyers, along with seven other groups of economists from Barcelona GSE, Cambridge University, CERGE – Charles University in Prague, Toulouse School of Economics, University of Bonn, Universidade Católica Portuguesa and University College London. Through seminars, workshops, conferences and other events, ADEMU has also involved many more researchers – including political scientists and historians – from universities and research centres worldwide, as well as policy maker. The IMF, ESM, Bank of Spain and the Deutsche Bundesbank have co-sponsored some of these events.

In sum, it has been a lively forum for research and policy debate on the Eurozone crisis and the future of the EMU, resulting in more than one hundred working papers and several PhD theses, among other things. An overview of the project’s findings and proposals can be found in the recently released VoxEU e-Book ‘The EMU after the Euro Crisis: Lessons and Possibilities,’ edited by Ramon Marimon and Thomas Cooley, as well as at ADEMU’s website.

Our findings cover a large spectrum of research topics – from the handling of the debt crisis and the design of fiscal policies in times of recession to the pressing need to complete the Banking Union and the stabilising role played by the ECB and ESM from 2012 onwards. Special attention has been given to risk-sharing – a basic fundamental form of solidarity, this year’s topic at The State of the Union – and economic stabilisation in the union. Not only is it one of the EMU’s main weaknesses, but it is also an area where much can be done to ‘forge Europe’.

Furthermore, based on ADEMU research, two proposals have emerged:

The European Stability Fund (ESF) as a constrained efficient mechanism. It is possible to substantially, and voluntarily, improve the risk-sharing capacity across heterogeneous European countries, without incurring undesired transfers or moral hazard problems and, in doing so, enhance the resilience of EMU to new crises and better confront the ‘debt overhang’ problem and the need for ‘safe assets’. We provide the theory and software, which shows how things would have been very different (and likely better) if the ESF – which can be built out of the ESM – had been in place during the crisis.

A European Unemployment Insurance System (EUIS), which has been a topic of discussion since the Marjolin Report. We illustrate the differences between European labour markets and UI policies, but also show how, in spite of these differences, there can be unanimity among Eurozone countries for a common EUIS with undefined coverage and a low replacement rate (around 15% of wage). However, such reforms require coordinated action.

Will Europe be ‘forged’ after the crisis? ADEMU has shown how it might be possible.

Ramon Marimon is Joint Chair Professor of Economics in the Department of Economics and the Robert Schuman Centre for Advanced Studies, where he holds the Pierre Werner Chair. He will speak at a panel entitled ‘Reassessing the Fiscal and Monetary Framework of EMU in 2018’ at The State of the Union.