In a new joint contribution with Daniela Schwarzer for Project Syndicate, we argue that the European Monetary Union needs a new stability pact which limits not government budgets, but imbalances in the current accounts of the member states. In such a pact, both deficit and surplus countries would be required to use their fiscal and general economic policies to strive for a rebalancing. If countries are uncooperative, they would be fined. In this way, dangerous trends of external indebtness for single countries can be limited as well as excessive beggar-thy-neighbor policies through revaluation limited.
Such a proposal would improve greatly the coordination of macroeconomic policies in EMU without actually centralizing the power for economic policy making directly in Brussels. We would thus hope that it is more realistic at the time being than a direct move towards a more centralized governance structure along the lines of other federal states. Read the full column at the Project Syndicate Website here.
There is also a longer policy paper on the issue which has just been published at the Stiftung Wissenschaft and Politik and can be accessed here.