Advanced Markets

Holistic Approaches to Solve the Euro Crisis

The Challenge

Fourteen years after its foundation, the European Monetary Union (EMU) is facing the greatest challenge of its history thus far. High unemployment in a number of member countries, the need for substantial consolidation of the budgets of numerous governments, and distressed banks are symptoms of economic misalignments and economic policy failure that threaten not only economic prosperity in Europe, but the European project as a whole. A series of interrelated fiscal and financial crises in the euro area have provoked a series of extraordinary policy measures. Some of these measures have undermined the fiscal sovereignty of affected countries, and they have circumvented market mechanisms. As social cohesion is called into question in various debtor countries, there is a danger that policy makers cannot or will not solve the existing problems in a way consistent with both monetary stability and the current political integration. The ECB’s announcement to possibly step in via its OMT-program has somewhat calmed down financial markets since mid-2012, but most of the fundamental questions for the future of Europe are either unanswered or answered quite differently by various parties. Policy makers have bought time, but the question remains what this time is used for and where the current policy stance leads to.

The euro area crisis is a major challenge both to policy makers and to social sciences. Various inter- woven economic dimensions and rivalling political demands complicate the design of a viable solution. Key questions to tackle are: Is there a common view on the roots of the crisis (diagnostic consensus)? What are the relevant alternatives in the current situation (scenarios and therapies)? To what extent have anti-crisis measures and their consequences (e.g. Target2 balances) narrowed down the set of future policy options? What should economic governance in the euro area look like once the crisis is over? Does a monetary union necessarily imply fiscal union and common economic governance? Where are the borderlines between policy cooperation and policy competition in the future EU? What criteria should be applied to assign competencies between the national and the European level? How to reconcile short-run emergency measures with the long-run architecture of the European policy framework? Are euro bonds a workable anti-crisis instrument or a burden for future fiscal and economic stability? What role should the European Central Bank play – back to Maastricht as soon as possible or even increasing its stimulus packages by intervening aggressively in capital markets? How to cope with various legacy problems or, put more generally, how to make sure that each country’s status-quo does not prevent solutions beneficial to all member countries? Who should carry the burden of past errors and future financial failures: tax payers or investors? Is euro area-wide solidarity a conditio-sine-qua-non or are orthogonal solutions in view that leave a surplus to reap by each party? Who are the most important players and political authorities to involve? And, last but not least, what is the role of market mechanisms that policy makers cannot or should not ignore?

This session is a platform to bring together alternative holistic approaches (policy packages) to ad-dress the current crisis and to shape Europe’s future governance structures. By discussing assumptions, strengths, and weaknesses of each approach this session envisages making a significant contribution to the European policy debate. Ideally, by identifying parallels and complementarities between different plans, this session will enrich each proposal and stimulate efforts to draft even more comprehensive policy solutions for the future of Europe.

Designing a Stable Euroland: The Corporate Perspective

The Challenge

It is obvious by now that the German economy is not immune to the on-going crisis: A severe drop in exports to the rest of the euro zone is hurting manufacturing. At the same time a combination of large-scale immigration and of capital inflows makes Germany look like a beneficiary of the gloom elsewhere. While the negative economic effects have so far been largely offset by rising domestic demand and exports to countries outside Europe, the longer-term consequences of the crisis may be severe: Economically, Germany will have difficulties to strive in a Europe in perma-crisis. Politically, Germany faces adverse reactions for the austerity it imposes on weaker partner countries.

This session puts a focus on the views of the German business community, which seems to be deeply divided over the euro crisis. Do big corporations basically agree with Mario Draghi’s “whatever it takes” approach, while many entrepreneurs oppose this stance? Is a break-up of the euro zone preferable to taking ever bigger fiscal risks, as some business leaders have argued? What needs to be done to create a monetary union that is stable over the long-term? Is the envisioned banking union a necessary condition (and what should it look like in detail)? Does the euro area need elements of a federal state such as area-wide redistribution systems (e.g. a common unemployment insurance)? How can the currency area strike a viable balance between market discipline and institutional force? Are there alternative options for Europe’s future, for instance reintroducing national currencies while at the same time creating new common projects (e. g. setting up a European welfare state, common armed forces etc.)?