Leading economists from France and Germany on Wednesday called for new fiscal rules for the eurozone and the creation of an independent watchdog to help to make the single currency more resilient against crises in the future. Their intervention comes as Germany and France seek to inject new momentum into stalled EU reform efforts, and on the same day that Eurogroup chief Mario Centeno promised eurozone finance ministers would deliver a reform plan by June.
The economists' "blueprint for reform" is intended to bridge German demands for more fiscal discipline and France's insistence on more risk-sharing. Wednesday's paper, entitled "Reconciling risk-sharing with market discipline: A constructive approach to eurozone reform", is authored by top economists from institutes such as Bruegel, Ifo and DIW, as well as Sciences Po in Paris.
"Our motivation is to not leave things the way they are. Europe needs reforms, and those have to go through France and Germany," Marcel Fratzscher of DIW told journalists at a Berlin press conference. In their 25-page paper, the economists warned that even if the single currency area was "finally experiencing a robust recovery... after nearly a decade of stagnation", it "remains fragile."
Despite the ongoing economic recovery, the case "for a reform of the eurozone architecture is strong", the economists said, calling for "a shift in the fiscal and financial governance of the eurozone." The fiscal rules laid out in the EU's Stability and Growth Pact - notably the rule that member states are not allowed to run up deficits in excess of 3.0 percent of their economies - "have not worked well," the economists wrote.
"Excessive public debts have accumulated because of banking crises and the Great Recession (of 2008), but also because either countries did not abide by European fiscal rules or the rules were not sufficiently stringent in good times," the economists said. The poor functioning of the current fiscal rules was due both to their design and the way in which they are monitored and enforced, the economists argued.
"Deficit targets give rise to pro-cyclical fiscal policy - for example, higher expenditures in good times and lower expenditure in bad times," they complained. Fiscal rules should be "as transparent and simple as possible," the economists wrote.
Monitoring should occur both at a national level - by an independent national fiscal council - and "under the oversight of a eurozone fiscal watchdog," the economists suggested. And enforcement "cannot rely solely on the threat of penalties that are unlikely to be credible," the economists wrote.
"We are drawing the lessons from the eurozone crisis, saying that there was a lack of solidarity, but also a lack of responsibility before the crisis," one of the authors, Philippe Martin, professor at Sciences Po Paris, told AFP. It was already a "major success" that "German and French economists who can have very different views on those topics managed to reach a common position," analyst Frederik Ducrozet of Pictet bank tweeted. "Now the hard part begins" as politicians take over, he added. "The status quo is not an option. We must reach compromises, even when points of view are very different," Eurogroup chief Centeno told German business daily Handelsblatt Wednesday - adding that he was "confident" of getting results.
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