Even more serious would be state insolvency, in which case the debts would not be repaid at all. This would increase inflation, and government bond yields would rise. Debt repayment in euros would therefore be a major problem for the budget of the country concerned. An unresolved issue is how the depreciation of the new currency would affect exchange rates.
An additional factor is the political will of the government. A disintegration of the euro area or the withdrawal of individual states would also signal the beginning of serious legal disputes, as there is currently no orderly legal procedure for this. Legal chaos and economic uncertainty would result. The belief in the irreversibility of the euro area would be destroyed, and confidence in the euro currency would also suffer. The disintegration of the monetary area would have negative consequences for political integration in Europe. None of the countries examined would benefit from withdrawing from the monetary union either.
There are too many economic, political and legal obstacles that need to be surmounted in too short a time. As already mentioned, a split in the euro would destroy the most important foundation of monetary union, namely the principle of the irreversibility of the single currency. Another problem is the aforementioned liabilities in the Eurosystem. It has often been suggested that members of the southern euro area should leave the monetary union.
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All these factors would make it possible to smoothly organise such a complex operation as the creation of a new currency. There is no question that Germany and Italy would find themselves in different currency systems if the split were to occur. However, it is unclear which camp France would be in.
A dismantling of the monetary union — whether controlled or uncontrolled — would pose major economic and political problems. Consideration should be given to how the stability of the monetary union could be improved when convergence processes are limited. Moreover, the debate on possible solutions to the euro crisis is strongly focused on the euro area rules. The search for new convergence criteria or a reform of the Stability and Growth Pact is the wrong way to go about this.
However, implementation poses many problems in both cases, relating to the way some economies function within the rigid framework of monetary union. All these issues are interconnected. The analysis in the previous sections has shown that most of the economic problems in the euro area are structural in nature. Italy and France in particular need to adapt their economic models to changing global and regional competition. Italy faces the greatest challenges in this transformation.
Both paths seem to be difficult to follow for political reasons. But, due to strict budgetary discipline and substantial debt servicing costs, Rome lacks the money. The literature on the diversity of capitalism concludes that existing economic models are subject to constant change.
The more favourable the economic outlook, the lower the political cost of national reform. An extensive analysis of the main elements necessary for successful structural reform was presented by the OECD in Economic reforms are much easier to implement in small euro area member states as opposed to large ones.
It is therefore not especially helpful to use the example of successful reforms in Ireland or Latvia for large countries. Both countries compiled legislative packages to liberalise their labour markets. How, then, can national reforms be accelerated using the instruments available within the economic governance of the monetary area? However, the CSRs do not trigger much public debate about the macroeconomic situation or the state of national reforms.
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Since , most of the country-specific recommendations related to Macroeconomic Imbalance Procedure have not been sufficiently implemented. The decentralisation of this assessment is a positive catalyst for reform. However, it remains a challenge to limit tasks appropriately at each level, and to carry out checks and balances without unduly complicating economic governance.
The reality is rather different. There have been several instances where the Commission has put more pressure on smaller member states than on the larger ones. The experience of the European Semester also shows that the institutions of large member states are inward-looking and have little interest in accepting external advice concerning structural reforms.
However, it is questionable whether transfers of funds to implement reforms would be a sufficient incentive for the largest euro states. Germany, France and Italy are the largest net contributors to the EU budget. Sanctions are another economic policy instrument. This instrument was strengthened during the euro area crisis for use against individual member states in the event of inadmissible national policies. Another way to create incentives for reform is through pressure from the financial markets. During the crisis, interest rates on government bonds from France, Italy and other countries rose.
This was an important warning signal from the financial markets; it showed that investors were increasingly distrustful of the economic prospects of these countries. In addition, at some stages of the crisis, the agencies over-reacted, thus contributing — along with some chaotic investor behaviour — to the escalation of the situation.
To date, during the euro crisis, the financial markets have been characterised by irrational and short-term thinking. Their actions service the need for quick profits. Whether the largest euro countries can indeed reform therefore remains unclear. The two coalition partners, the Lega and the Five-Star Movement, have announced some reforms to the justice system and the fight against corruption.
The projections of general government deficit in April raised the public deficit to 2. The case of France is different. President Emmanuel Macron has been more successful with reforms than his predecessors, benefiting from favourable economic conditions. But two years after his election, there was growing resistance from various social groups, while support for the president is declining. These events will also have a negative impact on economic activity.
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In the coming years, Germany will also be confronted with the need to review the sustainability of its economic model. The current trends show strong divergences in demographic outlook between the countries. According to the latest assessment by the Global Aging Report, between and Germany will have to face one of the highest increases of pension contributions of all EU countries measured in terms of GDP.
This issue particularly concerns the largest euro area countries. They tend to prefer intergovernmental contacts, whereas EU institutions tend to use them mainly when they see an opportunity for self-advancement. A key area of conflict has long been the implementation of the Stability and Growth Pact.
During the crisis, the heads of state or government or the finance ministers of the largest member states played a key role in many situations.
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The debate on further centralisation of economic governance has long focused on the idea of creating the post of a euro area finance minister with the aim of addressing the biggest institutional challenge to monetary union: the lack of a strong political centre. However, member states have very different ideas and imperatives on this issue. The post-holder would be a perfect target for national populist and EU-sceptical politicians, and would probably be used as a scapegoat for economic failures at the national level.
It is doubtful whether this would fulfil the promise of efficient decision-making and increased convergence. Examples such as Ireland, Portugal or Finland show that the success of reforms depends above all on the extent to which the political classes assume responsibility at the national level. The efficiency of national institutions also plays a significant role. It is the interplay between the EU level and national policy that primarily causes problems for monetary union. The asymmetry of political cycles at both levels makes political manoeuvres more difficult.
As a result, political attention was severely restricted in the run-up to the upcoming European elections in If the potential for political centralisation in the monetary union is limited, and yet its three largest economies have systemic importance, then Germany, France and Italy should strengthen their economic policy cooperation. Together with Italy, a kind of triumvirate has emerged that has already met twice, first in June in Berlin in response to the Brexit referendum, then in August on the Italian island of Ventotene.
The current government in Rome is founded on a majority that is in opposition to the current EU set-up and is not an easy partner for Berlin and Paris. It is difficult to imagine that these obstacles could be overcome in a few years. In this context, strengthening conditionality is the best means for creating incentives for reforms at national level. It is therefore necessary to clarify what concrete steps can be taken to make the euro area more resilient to internal and external shocks.
Two fundamental positions dominate the current debate on further euro stabilisation. The other side prefers decentralised fiscal responsibility and risk-sharing through the banking sector. Italy supported the idea of a euro stabilisation mechanism, but focused on another instrument: the creation of an unemployment insurance system for the entire monetary union. The US experience with a similar mechanism suggests that this step could help to strengthen convergence in the single currency area.
Another widely debated idea in the field of fiscal integration concerns partial debt mutualisation.
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The basic idea is to reduce the financing costs of those member states which are struggling with excessive debt levels. In practice, this means transferring the refinancing costs and the associated risk from one group of monetary union members to another. It would ensure that members view monetary union as irreversible. The European Commission had already put forward the idea of such stability bonds in , but the creditor countries in the currency area rejected them. This asset would have different degrees of seniority, which would mean a certain risk for the buyers.
There are two major obstacles to debt mutualisation.