A Critical Assessment Of The Eu Monetary, Fiscal And Financial Regulatory Framework And A Reform Proposal

Europe is at a critical crossroads for the evolution of its overall political and institutional design. Its founding goal, the creation of the internal single market, is consistent neither with the existing setup, nor with the direction recently impressed to that evolution. The inconsistency between the fiscal, monetary and financial regulatory framework and the construction of the single market cannot be solved by reforming the EU treaties simply because there is no agreement on the new design. Following Minsky’s analysis, we single out the weaknesses and fragilities of that framework when the heterogeneous reality of the EU is taken into account. While constraints on fiscal and monetary reforms derive from the existing treaties, for financial regulation they come from mixing the international approach, which makes financial stability dependent on the financial morphology freely determined by financial markets, with the belief that the EU integration will come from the operation of private interests. We show that the current approach to financial regulation fails on both regards. Complying with the existing EU treaties, we propose a reform of ECB operations that would create the single financial market, at least for the euro area, and allow a reform of the existing fiscal rules capable of converting the current deflationary stance into a reflationary one. To complete the strengthening of the systemic cushions of safety, following the Minskyan approach a radical reform of financial regulation is presented that would combine higher financial resilience with finance more closely serving national economies. The three reforms would critically contribute to the consistency of the euro area design and make its membership attractive for the non-euro EU countries that currently strongly oppose entering into it, at least for those that do not want to go on playing the inshore-offshore game.