Draghi Statement on “Fiscal Compact”

Mario Draghi’s statement before the European Parliament is available here.   

Some key paragraphs from statement:

Yet we are at a difficult stage at present. We have set up these new mechanisms, but their positive effects on the credibility of government fiscal policies are not yet visible. And the government changes that have taken place in some of the more exposed countries have not yet had much of an effect on the continuing fragility of financial markets.

Fundamental questions are being raised and they call for an answer. At the heart of these questions are not only the credibility of governments’ policies and the actual delivery of the promised reforms, but also the overall design of our common fiscal governance.

I am confident the new surveillance framework will restore confidence over time. I am also quite sure that countries overall are on the right track. But a credible signal is needed to give ultimate assurance over the short term.

What I believe our economic and monetary union needs is a new fiscal compact – a fundamental restatement of the fiscal rules together with the mutual fiscal commitments that euro area governments have made.

Just as we effectively have a compact that describes the essence of monetary policy – an independent central bank with a single objective of maintaining price stability – so a fiscal compact would enshrine the essence of fiscal rules and the government commitments taken so far, and ensure that the latter become fully credible, individually and collectively.

We might be asked whether a new fiscal compact would be enough to stabilise markets and how a credible longer-term vision can be helpful in the short term. Our answer is that it is definitely the most important element to start restoring credibility.

Other elements might follow, but the sequencing matters. And it is first and foremost important to get a commonly shared fiscal compact right. Confidence works backwards: if there is an anchor in the long term, it is easier to maintain trust in the short term. After all, investors are themselves often taking decisions with a long time horizon, especially with regard to government bonds.

A new fiscal compact would be the most important signal from euro area governments for embarking on a path of comprehensive deepening of economic integration. It would also present a clear trajectory for the future evolution of the euro area, thus framing expectations.

On the precise legal process that brings about a move towards a genuine economic union, we should keep our options open. Far-reaching Treaty changes should not be discarded, but faster processes are also conceivable.

Whatever the approach, companies, markets and the citizens of Europe expect policy-makers to act decisively to resolve the crisis. It is time to adapt the euro area design with a set of institutions, rules and processes that is commensurate with the requirements of monetary union.

Fixing Financial Crises – Lessons from the Asian and Global Financial Crises

Andrew Sheng will address this topic at the IIEA next Monday – details here.

Coordinated central bank action 
to address pressures in global money markets

The joint statement is here.

Twilight of the Technocrats: Ireland, Italy, and Austerity

Here’s a long-ish opinion piece I wrote for Foreign Affairs.

Let’s define austerity as a sharper than expected drop in government expenditure and a sharper than expected increase in taxes by a government experiencing a large budget deficit. To date there have been about 21 billion euros in austerity measures enacted in Ireland, with about the same amount to come in the future, and not a single riot.

The scale of austerity in Ireland must give Foreign Affairs readers pause. At the scale of the United States economy, this is the equivalent of shutting down the US Department of Defense. Italy is facing into a period of austerity as well. What can they expect?

Solving the Fiscal Crisis Via Limiting Government Commitments

Ludger Schuknecht has a long track record in writing on public finance (in the mid-2000s, he was prominent in highlighting the windfall nature of revenues associated with real estate booms).  He is now with the German Ministry of Finance and this paper outlines one approach to solving the fiscal crisis.