Debt Sustainability and Economic Convergence of Euro-Area Member States: Challenges and Solutions (Paolo Manasse)

23-02-2015

This paper argues that fiscal convergence in the Euro area has been achieved at the expenses of real divergence in unemployment, investment and, at least temporarily, growth. Statistical and econometric analysis supports the view that the current fiscal framework addressed debt sustainability concerns, but imparted a pro-cyclical bias, which contributed to economic divergence. The recent flexibility guidelines are a step in the right direction, but they are unlikely to have sizable effects. A reform of the fiscal framework and a mechanism for an intra-European unemployment insurance scheme is proposed.

This paper argues that fiscal convergence in the Euro area has been achieved at the expenses of real divergence in unemployment, investment and, at least temporarily, growth. Statistical and econometric analysis supports the view that the current fiscal framework addressed debt sustainability concerns, but imparted a pro-cyclical bias, which contributed to economic divergence. The recent flexibility guidelines are a step in the right direction, but they are unlikely to have sizable effects. A reform of the fiscal framework and a mechanism for an intra-European unemployment insurance scheme is proposed.