ADEMU Work Package 1:‘Long-term Sustainability of a Monetary and Fiscal Union’

Charles Brendon

University of Cambridge

Long-run sustainabilityThe purpose of WP1

“To conduct a rigorous investigation of risks to the

long-run sustainability of EMU, and to develop

detailed institutional proposals aimed at mitigating

these risks.”

Three components to analysis:

1. Understanding sovereign debt crises2. Ensuring debt sustainability3. Improving fiscal risk-sharing

Long-run sustainabilityThe Five Presidents’ Roadmap: steps towards fiscal union

Immediate step:I European Fiscal Board

I “The board would provide a public and independentassessment ... of how budgets – and their execution –perform against the economic objectives andrecommendations set out in the EU fiscal framework.”

Long-term step:I Euro-area `macroeconomic stabilisation function'

Long-run sustainabilityThe intergovernmental approach

EU fiscal framework → Decentralised decisions, central scrutiny

What concerns should shape this framework?

1. Recommendations & remedies for debt crisesI Firefighting/prevention

2. Minimising public debt burden & ensuring sustainabilityI Long-term oversight

Long-run sustainabilityThe intergovernmental approach

EU fiscal framework → Decentralised decisions, central scrutiny

What concerns should shape this framework?

1. Recommendations & remedies for debt crisesI Firefighting/prevention

2. Minimising public debt burden & ensuring sustainabilityI Long-term oversight

Long-run sustainabilityThe intergovernmental approach

EU fiscal framework → Decentralised decisions, central scrutiny

What concerns should shape this framework?

1. Recommendations & remedies for debt crisesI Firefighting/prevention

2. Minimising public debt burden & ensuring sustainabilityI Long-term oversight

Long-run sustainabilityThe intergovernmental approach

EU fiscal framework → Decentralised decisions, central scrutiny

What concerns should shape this framework?

1. Recommendations & remedies for debt crisesI Firefighting/prevention

2. Minimising public debt burden & ensuring sustainabilityI Long-term oversight

Long-run sustainability1. Understanding sovereign debt crises: ADEMU research

I Minimising future sovereign risksI Improved assessment of public-sector balance sheet risk

(Von Hagen)I EZ crisis in comparative historical context

(Corsetti, Teulings)

I Minimising impact of financial crisesI Pass-through from financial shocks to real economy

(Ulbricht, Hellwig)I Impact of financial crises on inequality

(Fornaro)

Long-run sustainability2. Minimising debt burden: ADEMU research

I Implementing fiscal reformsI Effect of reforms on private wealth & uncertainty

(Corsetti, Teulings)I Improvements to labour & capital tax structure

(Ábrahám)

I Designing targets for public debtI Role of debt in absorbing savings

(Gottardi)I Desirable simple policy rules

(Brendon)

Long-run sustainabilityThe more ambitious agenda...

“Intergovernmentalism has been necessary to handle the

crisis, but it has failed to provide Europe with a

common project ... We need transfers to accompany

reforms. We need responsibility and solidarity.”

Long-run sustainability3. Risk-sharing: ADEMU research

I A Financial Stability Fund as a component of fiscal unionI Risk of unforeseen shocks to debt stocksI EMU obvious basis for cross-country insuranceI How to design a scheme with incentives to participate?

(Marimon, Kapicka, Pappa, Ábrahám)

I Mutualisation of short-term debt?I Minimise liquidity shocks to debt service costs

(Hellwig)