The euro area still requires the kind of political institutions that provide “shock absorbers” in order to prevent a repeat of some of the features of the debt crisis, according to the ECB’s José González-Páramo.
González-Páramo, a member of European Central Bank’s (ECB’s) executive board, has argued in favour of a “two pillar” approach in order to try and mimic the kinds of political federations that would prevent the build-up of current account imbalances and strengthen crisis responses.
He says: “The first pillar is to strengthen fundamentally the governance procedures which prevent imbalances from arising.
“With fewer shock-absorbing institutions to mitigate crises when they arise, the euro area has learned that it must become more effective at preventing imbalances.
“This process has involved tightening the rules for fiscal policies and creating a much needed framework to monitor broader macroeconomic imbalances and competitiveness.”
He adds: “The second pillar to compensate for the euro area’s ‘missing institutions’, therefore, is to strengthen the way in which the euro area as a whole manages crises.
“Having witnessed how imbalances in one euro area country – no matter how small – can become systemic and create financial obligations for other taxpayers, the EU institutions, national governments and national parliaments are now playing a much stronger role in demanding and monitoring economic reforms.”
While González-Páramo argued the necessity of such an addition to the single currency framework, a “loss of sovereignty” is an inevitable consequence as the eurozone has proved it is not self-adjusting.