The Political Unification: A Long-Term Solution to the Problems Faced by the Eurosystem
Keywords:
political and monetary union, fiscal policy, fiscal stability, financial crisis, asymmetric shocks.Abstract
The debates regarding fiscal federalism also occurred twenty years ago. Professor Otmar Issing, chief economist of Bundesbankat that time, was originally one of those who supported political unification, which is indispensable for the functioning of the monetary union. Subsequently he changed his view, believing that the functioning of the European Monetary Union will be possible even in the absence of a fiscal union, on two conditions: that there is an independent central bank, focused on price stability (the European Central Bank) and a strong commitment of the Member States regarding fiscal stability, guaranteed by a code of appropriate fiscal conduct (the Stability and Growth Pact).
However, the Stability and Growth Pact was violated by a number of countries in 2004, such as Germany and France, which paved the way for free-riding fiscal policies, especially in Greece. Countries such as Ireland, Spain and Italy have fully complied with the requirements of the pact, which shows that the principle of sound fiscal policies is not enough to guarantee the sustainability of the single currency. The Eurozone crisis has provided important lessons, which now need to be translated into reforms.
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