Feasible and much needed reforms for the EMU: the European Stability Fund et al.

Abstract

This paper focuses on three legacies of the euro crisis that still need to be properly addressed in order to prevent new crises, gain resilience and grow: the Euro area divide legacy, the debt legacy and the fiscal time-inconsistency legacy (i.e. fiscal policies are not sufficiently counter-cyclical). First, it argues in favour of implementing ‘experience-rated policies,’ which can benefit all without incurring undesired transfers; examples are the European Deposit Insurance Scheme (EDIS) and the European Unemployment Insurance System (EUIS). Second, it argues in favour of strengthening the fiscal institutional framework of the EMU by broadening the scope of the European Stability Mechanism so as to make it a proper European Stability Fund, which, in addition to transforming current contracts into more efficient ESF contracts, should be able to: host the central funds of the EDIS and EUIS; provide risk-sharing among the participating countries; transform part of the legacy sovereign debt into safe ESF contracts; and, as a result of its larger scope and its ‘constrained-efficient contracts,’ be in a position to issue ‘safe’ eurobonds.