How Can EMU Survive?

Whether or not Greece stays in EMU, the pace of policy change is accelerating. Although the risks are rising, a road to EMU’s survival is possible. ING’s new report sets out three dimensions – reform, reflation and redistribution – along which it might be built. These are combined in different permutations into ‘Six Scenarios for Survival’: Austeria, Draghia (banking union), Bondia (funding union), Europhilia (transfer/fiscal union), Inflationia (a.k.a. Outer Draghia), and Krugmania.
Austeria is a recipe for deepening economic contraction and debt relief via default. Banking union and funding union – in Draghia and Bondia – could break the link between bank and sovereign solvency, allowing funding costs and bond spreads to fall sharply. Fiscal discipline, a likely pre-condition for either scenario, may create momentum towards a Europhilia fiscal union scenario. These alternatives offer the possibility of boosting growth – by anywhere from 1% to 2% by the second year. But more aggressive monetary (Inflationia) or fiscal (Krugmania) reflation could lift the boost to 4% or more, albeit at the cost of higher inflation. However, for now, the mutualisation of risk, outright fiscal transfers, or more reflationary policies are anathema to Germany. Still, recall that Chancellor Merkel keeps saying “if the Euro fails, Europe fails”…
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This entry was posted in EMU, Macro, Macroeconomics, Uncategorized and tagged , , . Bookmark the permalink.

One Response to How Can EMU Survive?

  1. André Lunardelli says:

    I am suggesting another scenario: raising the euro’s inflation target without an inflationary default, with actions such as the substitution of previously issued bonds by new ones with higher denominated nominal rates of interest.
    The proposed policy is described in this link: http://andrelunardelli.blogspot.com.br/2012/07/raising-euros-inflation-target-without.html

    What do you think?

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