Five Years of Euro Crisis: An Interim Assessment of Eurozone Crisis Policy by the Economic Research Institutes in the Leibniz Association - Important Reform Steps Still Pending

The current European refugee crisis has diverted media attention away from the European debt crisis. The problem of high public debt in the eurozone, however, is far from being solved and may aggravate the euro crisis again. In particular, the eurozone still lacks a viable insolvency procedure for member states. That is the result of an interim assessment of the euro crisis, presented by economists of the Centre for European Economic Research (ZEW) in cooperation with scientists from five other economic research institutes in the Leibniz Association.

Despite their criticism, the authors of the report see a number of positive developments. They emphasize that the failure to solve the Greek crisis must not distort our evaluation of positive developments in other crisis-ridden countries. For instance, the gross domestic product of Ireland, Portugal and Spain has risen since 2013. In the case of Ireland, it has even reached pre-crisis level. Furthermore, the budget deficits of Ireland, Portugal and Spain have been reduced.

In their report, the researchers draw the conclusion that the emergency measures taken to rescue the euro are acceptable, but have significant and detrimental side effects. These long-term consequences, the researchers believe, have been disregarded too much. For instance: Due to its bond purchasing programme, the European Central Bank has come to play a questionable part in government financing. The programme provides the euro countries with more favourable conditions to finance their budgets. Unfortunately, it also incentivises their governments to defer reforms. This effect of the programme is especially disastrous since the eurozone is still lacking an insolvency procedure for sovereigns. The absence of such a mechanism undermines the credibility of the threat to leave heavily-indebted countries to their own resources, should necessity require it. The problems emerging from this situation became plainly apparent during the first Tsipras government in Greece. It is also in no way foreseeable whether the current government led by Alexis Tsipras will comply with its reform commitments. As long as an insolvency procedure for sovereigns does not exist in the euro area, the scenario of a national bankruptcy remains an empty threat.

The interim assessment of the euro crisis stresses that it would be risky not to urge further reforms in the eurozone, only because other problems currently have the spotlight. Economic growthis sluggish, new violations against the Stability and Growth Pact are already in sight, and the reform pace in many member states of the eurozone is insufficient. These factors increase the probability of recurring crises of confidence around highly-indebted euro states in the near future.

It is thus imperative to remove the persisting flaws of the Stability Pact's mechanism of sanctions. The final decisions are still up to the European Council. In the end, this means that the obligation to monitor and sanction has remained with the indebted governments themselves. Therefore, the current measures and reforms should be regarded as a first step to further reforms.

The report is a combined effort of the six Leibniz research institutes in the Leibniz Research Alliance "Crises of a Globalised World" (in alphabetical order): Centre for European Economic Research (ZEW Mannheim), German Institute for Economic Research (DIW Berlin), Halle Institute for Economic Research (IWH), Ifo Institute for Economic Research (ifo Munich), Kiel Institute for the World Economy (ifw Kiel), RWI Essen.

For more information please contact

Professor Friedrich Heinemann, Phone: +49(0)621/1235-149, E-mail: heinemann@zew.de