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S. Micossi: Towards a Joint Debt Instrument and Fiscal Capacity

image-09/28/2016 - 12:12The European Union is going through a very difficult phase, besieged by historic internal and external security challenges, unmanageable migratory follows, and deep-seated discontent among its citizens. With Brexit came the first tangible sign that the process of European integration is not irreversible. The area’s financial conditions, at this moment, are relatively stable, but this stability could prove ephemeral, since severe tensions and divergences permeate the euro system.

On the one hand, divergences in the fundamental economic variables between Northern European member states (the “core”) and those in the south (the “periphery”) are not going away. Policies to limit deficits and public debt face mounting internal obstacles, in an environment of high unemployment and low economic growth. Extensive areas of fragility in the banking system remain. Political systems are weakened by the rise of populist parties, who dwell on public discontent and use it to fuel anti-European sentiments.

At the same time, discussions on strengthening the area’s common economic policies are stalling. The credibility of the Stability and Growth Pact has crumbled, caught in a vise between opposing visions—respect for European rules is pitted against requests for budget flexibility to bolster political consensus. Negotiations on Banking Union at the ECOFIN Council are gridlocked due to an inability to agree on the issue of risk reduction. The European Commission is criticized in Berlin because it has not succeeded in enforcing the rules and in Rome because the rules are considered too rigid. 

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