The future of economic governance in the the EU - European Union Committee Contents

Supplementary memorandum by Dr Marco Annunziata, Chief Economist, Unicredit Group (EGE 16)

  1. Sanctions under the SGP and the proposed excessive imbalance procedure should be at the very least semi-automatic. If they were left to political discretion, experience suggests that they will probably never be imposed, and they would therefore not have any deterrent effect. In fact, even the semi-automatic mechanism which has been mooted might not be sufficient, as countries could still mobilize a political majority to block the sanctions. For the sanctions to be credible, the room for political discretion should be minimized—this is the sad but realistic lesson from the original SGP.

  2. Indeed, imposing fines on a country that is by definition struggling to put its public finances in order might prove counterproductive, worsening its fiscal position further. It might be more sensible to consider alternative sanctions such as temporary suspensions of voting rights.

  3. The idea of a common Eurozone bond is sometime floated as a possible panacea. It is important to realize that a common Eurozone bond would need to be backed by a common pool of resources, presumably a pooling of tax revenues from the individual governments. This in itself would represent some pooling of sovereignty that government would need to be ready to accept. Moreover, the pooled revenues would need to be in some way "secured" or set aside in an ad-hoc fund. Otherwise the free-rider problem would recur: if country X allowed a significant deterioration of its fiscal accounts, the creditworthiness of the common bonds would deteriorate, to the detriment of all countries participating in the scheme. To put it differently, either the bonds would be backed by a strong and credible commitment from all countries, or they would represent a hidden transfer of resources, as "strong" countries would be facing a higher borrowing cost than if they acted alone, while "weaker" countries a lower cost.

November 2010

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