Euro-Zone Reform Proposals Don’t Go Far Enough

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Large bank failures in recent years have led to reforms that strengthen crisis prevention and give regulators and banks the tools for dealing with crises that do occur. Similar policy measures can be helpful in dealing with sovereign crises — when governments run out of money and credit. Unfortunately, the European Commission misses the mark in its recent proposals to upgrade the euro zone’s sovereign crisis management system.

To reduce the likelihood of a bank crisis, recent reforms have mandated that banks increase capital requirements during economic expansions, allowing them to fall during contractions or recessions. Governments can benefit from the countercyclical approach, too. It is fine to have policies such as the EU’s Growth and Stability Pact that limit government deficits and debt, but instead of blanket limits, these parameters should vary depending on economic conditions, allowing higher levels during recessions but mandating more of a buffer during better times. The EU could also encourage the use of GDP-linked bonds issued by national governments, where the debt payments vary inversely with growth. This mirrors the now mandatory use of bail-in rules at banks…

Read more : Bloomberg, 22.12.2017