Completing the Economic and Monetary Union: Wisdom Come Late?
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Completing the Economic and Monetary Union: Wisdom Come Late? Francesco Spadafora1 Received: 21 June 2019 / Accepted: 1 August 2019 © Società Italiana degli Economisti (Italian Economic Association) 2019
Abstract This paper provides a critical stocktaking of the debate on completing the Economic and Monetary Union (EMU) and an evaluation of the main reform priorities to strengthening its institutional architecture. In response to the sovereign debt crisis, reforms of the EMU have resulted in significant progress towards greater integration, as best epitomised by the establishment of the European Stability Mechanism (ESM) and the first two pillars of a Banking Union. In addition, the fiscal governance framework has been overhauled, with stricter rules and more powers at the supranational level to affect national budgetary policies. Because of these reforms, as well as of other policy measures at the national level, risks in the sovereign and banking sectors have been substantially reduced. The paper argues that major advances in risk reduction have not been matched by parallel progress in risk sharing: this asymmetry leaves the EMU incomplete and vulnerable. The paper contributes to the debate in three main ways: it examines the reforms proposed for the ESM, evaluates the role of a European Deposit Insurance Scheme—Banking Union’s missing third pillar—and reviews the case for establishing a central fiscal capacity for countercyclical manoeuvre. The paper emphasises that making progress in each of these architectural components of the EMU would go a long way toward closing the gap between risk sharing and risk reduction and ensuring the longer-term viability of the EMU. Keywords Economic and Monetary Union · Banking Union · European Stability Mechanism · Fiscal capacity · Sovereign-bank nexus JEL Classification E58 · E62 · F42 · F45 · G28 · H63
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Francesco Spadafora [email protected] International Monetary Fund and Bank of Italy, 700 19th St. NW, Washington, DC 20431, USA
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F. Spadafora Wisdom comes to us when it can no longer do any good Gabriel García Márquez, Love in the Time of Cholera, 1985
1 Introduction While the causes and the policy responses to the sovereign debt crisis that began in Greece in 2010 remain the subjects of an intense debate,1 the way the Economic and Monetary Union (EMU) has come through the crisis is per se a source of wonder among scholars of the European integration, who ask themselves a fundamental question: why did the EMU become deeper and more integrated when many feared for its survival?2 The crisis has dramatically exposed the flaws in the EMU’s institutional architecture and has acted as a very powerful agent of change. The ensuing reforms have resulted in important achievements towards greater integration, as best epitomised by the establishment of the European Stability Mechanism (ESM) and the first two pillars of a Banking Union. These reforms, and the unprecedented monetary policy response by the European Central Bank, have paved the way for major improvements in mac
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