Working Paper: CEPR ID: DP9414
Authors: Christoph M. Schmidt; Benjamin Weigert
Abstract: The euro area is experiencing a severe and highly complex crisis. It comprises three problem areas, the difficulties of some highly indebted European sovereigns to ascertain funding at palatable cost, the disconcerting fragility of the European banking system and disappointing growth prospects in the euro area periphery. To make matters even worse, these problems have developed into a systemic crisis of the European Monetary Union (EMU), since observers have apparently developed fundamental doubts over its integrity. To overcome this systemic crisis, it would not be sufficient, if only the stronger euro area economies provided more solidarity, nor would it be sufficient, if only all of Europe adhered to ironclad budgetary discipline from now on. A European Redemption Pact could be a strong political commitment to the EMU and offer a bridge between the proponents of fiscal discipline and structural reform and those governments advocating for more support. This pact would entail two indispensable aspects, the codification of a credible and coherent reform path and a temporary and limited instrument for joint refinancing.
Keywords: debt sustainability; euro crisis; European Redemption Pact; financial market regulation; governance of the euro area
JEL Codes: E42; E60; F24; G28; H6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| sovereign debt levels (H63) | stability of the banking sector (G21) |
| rising public debt (H69) | bank balance sheets (G21) |
| bank balance sheets (G21) | economic growth (O49) |
| fiscal consolidation efforts (H69) | lower debt ratios (G32) |
| structural reforms (E69) | economic growth (O49) |
| European Redemption Pact (ERP) (F36) | manage debt sustainably (H63) |
| commitment of countries (F53) | success of ERP (L25) |
| absence of coherent strategy (L21) | piecemeal approach (B53) |