This encounter with Professor Guido Tabellini, Rector and Full Professor of Economics at the Luigi Bocconi University, gave the Aspen Junior Fellows an in-depth look at today’s issues. Twenty years after Maastricht, Europe’s economic and financial scenario has changed radically. The outlines of European unity were born of an optimistic forecast of the ability to govern a monetary – albeit not yet political or fiscal – union in the context of growing financial integration. Today, the European Union is at the crossways of decisions with serious and uncertain consequences: greater integration, which should be pursued rapidly and under the pressure of the markets, or – on the contrary – a reduction of the eurozone with particularly high costs.
There are two negative spiraling tendencies in the present crisis that need to be stopped. The first is lack of confidence in the public debt, which lowers income and the aggregate demand of Southern Europe, as well as growth (as does the greater fiscal austerity needed for debt reduction). The second concerns relations with the state and the banks (in Ireland and Spain for example). Bank rescues by an individual state will lead to fallout on sovereign debt, feeding lack of confidence and increasing the risk of bank runs.
How can these tendencies be stopped? Tax policies cannot be counted on as a resource because revenues are set aside to restore state finances. One important, and often suggested, instrument would be a more expansive monetary policy by the ECB. In times of financial crisis, monetary policy plays a role similar to that of tax policy. Following the 2007-2008 crisis, the Federal Reserve promised transfers to banks and families, but the case of the United States underlines the limitations of this kind of maneuvering. A second initiative would involve the bank union and European-level centralized supervision of deposit guarantees. Finally, separation between monetary and tax policy should be suspended, and the ECB allowed to provide direct support to government bonds of countries at risk. Under normal conditions, separation works. However, it is incompatible with the survival of a single monetary system during the current crisis with its de facto shift from a monetary system based on a single currency to a fixed exchange rate. From the viewpoint of monetary policy used to support tax policy, even Eurobonds – while still not enough – can be extremely useful.
Each of these remedies implies greater political integration for Europe. This choice should not, however, be the result of increased market pressure, but rather a carefully considered reflection on the benefits and feasibility of a broader and more integrated European project. Instead, with their tendency to procrastinate at each meeting, European leaders run the risk of letting the situation precipitate in ways and at times both unexpected and unpredictable. Not only Europe’s leaders, but also its citizens should be able to choose the important step of greater integration across multiple fronts – including political – wisely. The far more expensive alternative is abandonment of the European project that has assured peace and prosperity for the continent over the last sixty years.