Alternative economic policies in the euro zone

The chapter analyses in two ways the alternative economic policies that are put forward to overcome the blockages of the euro area. First, the consistency of the different alternatives is discussed; second, a two-country SFC model of the monetary union is used to evaluate the macroeconomic impact of these alternatives. Several typical alternative structures have been suggested: reaffirmation of the no-bail-out clause for the national governments, fiscal federalism, eurobonds, creation of a Euro Treasury. These alternatives, and other more pragmatic ones, raise many problems and are, in many cases, hardly realistic in political terms. According to the simulations of the SFC model, the stabilisation effects advocated by the ‘international risk-sharing approach' are weak or even nonexistent in some cases. When interest rates increase due to credit rationing, a cumulative slowdown can emerge. On the contrary a federal budget, even if small but with federal transfers, can have an efficient stabilising role. Large European investments projects financed by eurobonds are also a powerful instrument. The mutualisation of public national debts with eurobonds or the enlargement of financial support by northern countries can contribute to stabilisation, but in a limited way. On the whole, the alternative economic policies are whether unlikely (federal budget, eurobonds), or hardly feasible (European investments) or have only a limited impact (eurobonds, northern financial support). The risk of a status quo is high.