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As a result of the financial crisis and the ensuing economic collapse, the budget deficits of many euro area countries expanded significantly. In 2010, the deficit was above the threshold of 3 per cent of gross domestic product in 14 out of the 17 countries.
Indeed, in Ireland action to rescue the domestic banking system pushed the deficit up to just under 31 per cent of GDP in 2010. The concomitant increase in the debt ratio and doubts about debt sustainability led the capital markets to demand very high interest rates in return for financing Greece, Ireland and Portugal. These countries decided to request assistance from the other euro-area countries – though, of course, subject to strict austerity conditions. What is sometimes felt to be an imposition in the countries concerned is ultimately in the interests of the crisis-hit countries themselves.
The more stringent European fiscal rules and national requirements such as the German debt brake are a step in the right direction. However, they will only be useful, of course, if they are actually adhered to and do not just exist on paper. I am not unaware of the criticism often levelled at what is perceived as “austerity dogma”, and the frequently expressed fears of slash-and-burn spending cuts leading to recession. In my view, there is no alternative to sustained consolidation in public finances. “Business as usual” in fiscal policy would sow doubts on the financial markets about the sustainability of public finances in some of the crisis-hit countries, and thereby only exacerbate the crisis in confidence. Consolidation and growth are not mutually exclusive in the medium term – in fact, they are mutually dependent.
The monetary union needs to stand on a firm foundation if it is to be stable in the long term and flourish. Of central importance to this is that appropriate account be taken of the incentive system underlying all human behaviour: those who bear responsibility must answer for it. Economists and lawyers call this the principle of liability. It is essential to the structural design of the European monetary union.
Despite increasingly mutualised liability however, the scope for mutualised control has not been expanded to the same extent. In order to restore the balance between control and liability, there are two basic options available.
Either we take the step towards deeper fiscal integration, or we further develop the existing institutional framework and strengthen individual countries’ responsibility for themselves. As long as there is no willingness for a far-reaching cession of sovereignty in fiscal matters, then the principle of individual national responsibility enshrined in the Maastricht framework must be strengthened.
The fiscal compact, which was beefed up last year, is to be welcomed in this respect. Now it is a question of implementing the more stringent rules and ensuring they are adhered to. It is the task of the European Commission to keep an effective watch on compliance with the rules. However, it is not only the new fiscal rules which aim to bolster the principle of individual responsibility – this is also part and parcel of the major institutional project going by the name of European Banking Union. For me, banking union entails a single European banking supervisory mechanism and a single European recovery and resolution mechanism. I regard the notion of a single deposit guarantee scheme as premature at best.