Policy Article

Dealing with the Eurozone Debt Crisis: A Proposal for Reform

Kiel Policy Briefs

Against the backdrop of the Euro crisis the authors develop a proposal how to organize economic assistance for crisis countries. Each Eurozone government that wishes to have access to the Eurozone rescue package should fulfil two requirements. First formulate a fiscal rule: This rule must specify (1) the country's long-run debt ratio, (2) the fiscal convergence rate and (3) the degree of fiscal counter-cyclicality. Second create a fiscal authority or constitutional amendment to implement the rule: Since the fiscal rule allows for counter-cyclical fiscal policy, it requires estimation of the country's business cycle. The fiscal authority (Debt Commission) would comprise independent technical experts who estimate the country's business cycle and determine the government's deficit or surplus that is consistent with the fiscal rule. The Debt Commission would have veto power over the government's fiscal decisions, to ensure that the government's fiscal rule is followed. Alternatively, the fiscal rule could be implemented through a constitutional amendment committing governments to adhere to this rule.

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