Recasting the Macroeconomic Policy-making System in Europe

Abstract:

The macroeconomic policy-making system in Europe is in profound crisis. The conventional view is that there were clear rules in place, and clear understandings, and that what went wrong was that the rules were flouted and the under standings were not properly respected. I claim that this conventional wisdom is mistaken. In my opinion, the crisis is a direct consequence of the inappropriate policy-making system which was adopted when the Euro was established twelve years ago. It is widely agreed that solving the current crisis in Europe will require immediate action of four kinds: recapitalisation of European banks, Europe-wide fiscal support for the lender-of last-resort activities of the ECB, immediate strengthening of the EFSF so that it can manage Europe's sovereign debt crisis, and a much closer integration of fiscal policies amongst the Eurozone nations.