A sustainable Eurozone with exit options

Abstract

Most studies on the future of the Euro point to serious risks in the coming years-risks to its very survival. The roadmap of the Five EU Presidents presented in 2015 comes up with little to reduce the risks to the Eurozone, such as new economic shocks and Brexit-type developments. The EU presidents rely too much on high international economic growth to smooth convergence in labour productivity between EU member states. Indeed, the more likely low-growth scenario shows a serious risk of the Eurozone falling apart in a chaotic way. The Eurozone needs to face up to these challenges. More transfer of sovereignty on financial policy is required to ensure adherence to agreed rules on public and private debt, while recognising that these rules need to be framed in such a way that the implementation of the rules is politically feasible. The "debt overhang" of Euro countries also needs to be addressed. This requires de facto a "Euro New Deal" between the core Euro countries (in particular Germany) and southern countries to agree a new system of solidarity, framed so as to avoid new moral hazards. We argue that the best guarantee for a survival of the Euro is to create well-organised and automatic exits if the terms of the new agreement are violated. The Banking union is a no-brainer for the EU as a whole and the Eurozone in particular. It needs a strong and independent supervisor and to be immune from compromises of the lowest common denominator. Banks need to be split into a "public" (heavily-regulated and properly-guaranteed) part and a commercial part (without guarantees in case of failure). With such changes a perhaps smaller Eurozone can remain a place for fostering welfare and happiness.