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Reconciling risk sharing with market discipline: A constructive approach to Euro area reform

The CEPR policy contribution, written by a group of French and German economists, proposes six reforms which, if delivered as a package, would improve – according to the authors – the Eurozone’s financial stability, political cohesion, and potential for delivering prosperity to its citizens, all while addressing the priorities and concerns of participating countries.

CEPR policy insight No. 91
17 January 2018
Source: Centre for Economic Policy Research

Agnès Bénassy-Quéré, Paris School of Economics and University of Paris 1; Markus Brunnermeier, Princeton University; Henrik Enderlein, Hertie School of Governance and Jacques Delors Institute Berlin; Emmanuel Farhi, Harvard University; Marcel Fratzscher, DIW and Humboldt University Berlin; Clemens Fuest, Ifo Institute and University of Munich; Pierre-Olivier Gourinchas, University of California at Berkeley; Philippe Martin, Sciences Po, Paris and Conseil d’Analyse Économique; Jean Pisani-Ferry, Bruegel, EUI, Hertie School of Governance and Sciences Po; Hélène Rey, London Business School; Isabel Schnabel, University of Bonn and German Council of Economic Experts; Nicolas Véron, Bruegel and Peterson Institute for International Economics; Beatrice Weder di Mauro, INSEAD and University of Mainz; and Jeromin Zettelmeyer, Peterson Institute for International Economics

> Reconciling risk sharing with market discipline: A constructive approach to euro area reform


After nearly a decade of stagnation, the Eurozone is finally experiencing a robust recovery. While this comes as a relief – particularly in countries with high debt and unemployment levels – it is also breeding complacency about the underlying state of the Eurozone. Maintaining the status quo or settling for marginal changes would be a serious mistake, however, because the currency union continues to suffer from critical weaknesses, including financial fragility, suboptimal conditions for long-term growth, and deep economic and political divisions. While these problems have many causes, a poorly designed fiscal and financial architecture is an important contributor to all of them:

  • The ‘doom loop’ between banks and sovereigns continues to pose a major threat to individual member states and the Eurozone as a whole. An incomplete banking union and fragmented capital markets prevent the Eurozone from reaping the full benefits of monetary integration and from achieving better risk sharing through market mechanisms.
  • Fiscal rules are non-transparent, pro-cyclical, and divisive, and have not been very effective in reducing public debts. The flaws in the Eurozone’s fiscal architecture have overburdened the ECB and increasingly given rise to political tensions.

The Eurozone’s inability to deal with insolvent countries other than through crisis loans conditioned on harsh fiscal adjustment has fuelled nationalist and populist movements in both debtor and creditor countries. The resulting loss of trust may eventually threaten not just the euro, but the entire European project, the authors say.

The French and German authors hold a range of opinions but have worked together to overcome the lack of reform caused by their countries’ typically opposing views. All authors contributed in a purely personal capacity, irrespective of the policy roles they may have or have had in a recent past.