tag:blogger.com,1999:blog-75733856288749599542011-09-21T07:06:49.765+01:00There is no intergalactic tradeJakob Almerudhttp://www.blogger.com/profile/06366547582572615257noreply@blogger.comBlogger11100tag:blogger.com,1999:blog-7573385628874959954.post-20502434715292580782011-09-20T07:15:00.004+01:002011-09-20T07:50:41.040+01:00Several economists have for a long time pointed out that a currency union without common fiscal policy is very fragile. To get around this problem the stability pact was introduced. There are however at least two problems with the pact. One problem is that you do not know if the rules of the pact are sufficient (I myself think that the Spanish debt crisis, driven by private debt, shows that it is not). Another problem is that there is no plausible punishment mechanism which forces the countries the follow the rule. For example, Germany and France broke the rules almost immediately after the implementation of the Euro.<br /><br />The first problem that I took up can be fixed by state policy, but should not be left to the states to decide about indepenently without a broader European discussion. The reason for this is that as we have seen this year, the different economies are intimately intertwined. Different countries might need different solutions, but they should be discussed at an international level.<br /><br />The second problem might be fixed with a clause that says that if a government breaks the rules and run a bigger deficit than allowed, or have a national debt moves up to over 60 percent of GDP (many countries are above this level at the moment, but this is more of a long-run solution suggestion), then the Eurofund buys up this debt and the country looses sovereignty over the fiscal policy until the debt is repaid. In other words, Euro-economists come in and take over until the situation is fixed.<br /><br />By having such a rule, the countries are still economically sovereign until a certain point. You let countries keep their sovereignty (which we have to do since Europe is far from ready for something else), but with the difference that they might loose it (of course, then they are less sovereign than before, but this is needed). They will also only loose their sovereignty for some time, rather than forever. At the same time, by having the transfer mechanism, countries that need help will also be able to get it, if the loaning conditions are good enough.<br /><br />And the best thing with this suggestion is that some version of it might actually be able to go through the Euro bureaucracy into law. This is at least my view, which of course might be wrong.<br /><br />And I think that this is enough for my first post<div class="blogger-post-footer"><img width='1' height='1' src='https://blogger.googleusercontent.com/tracker/7573385628874959954-2050243471529258078?l=jalmerud.blogspot.com' alt='' /></div>Jakob Almerudhttp://www.blogger.com/profile/06366547582572615257noreply@blogger.com0