Coordinating Economic Policies in Europe

The 2008 financial crisis, the ensuing economic crisis, and the euro zone sovereign debt crisis make reform of economic governance in the euro zone a necessity. When the euro was created, it was decided to not fully coordinate economic policies – instead the decision was made to set up a system of safeguards against national behavior that would be detrimental to the zone’s stability. This system showed its limitations and, faced with an emergency, the zone’s nations have reformed the framework of the monetary union’s economic policy.

It is indisputable that euro zone governments have made progress in their economic governance. The rules have been strengthened and especially the acceptance on a national level of European constraints should lead to countries better following the rules. Nevertheless, the conscious choice of largely decentralizing economic policy raises problems, in particular less transparency on a European level and making it more difficult to evaluate risk. Moreover, the refusal to allow the central bank distinguish between sovereign debts detracts from the robustness of its independence. Reinforcing the European system requires delegating the evaluation of its national actions to a common, independent European body. Making these evaluations public would strengthen the market’s disciplinary power, which is naturally regulatory.