ZEW Lunch Debate in Brussels: The Architecture of an Adjustable and Stable Euro Area

The third event within the "ZEW Lunch Debates" series featured three short presentations on European fiscal policy by renowned experts in Brussels on 30 June 2014. ZEW President Clemens Fuest welcomed as panelists: Friedrich Heinemann, head of research department at ZEW, Klaus Regling, Chief Executive Officer of ESM, and Nicolas Carnot, advisor on fiscal policy in the Directorate-General for Economic and Financial Affairs at the European Commission. Some 50 invited guests from the European Commission and the European Parliament as well as industry associations, research institutions and the media attended the event. The subsequent panel discussion was characterised by a lively exchange of the panelists' divergent views and a high level of participation from the audience.

Friedrich Heinemann, researcher in the field of fiscal policy and government debt at the Centre for European Economic Research, presented the VIPS reform proposal (“Viable Insolvency Procedure for Sovereigns”). The concept of VIPS was developed by ZEW economists Clemens Fuest, Friedrich Heinemann, and Christoph Schröder. The core of this concept is a mechanism that guarantees that, in case of sovereign default of a state within the eurozone, liability lies with the holders of government bonds instead of tax payers, thus restoring market discipline. In order to avoid destabilisation of the still fragile euro area, VIPS proposes a delayed implementation of this mechanism. According to Heinemann, this integral element is still missing within the eurozone architecture such as it had been created during the crisis years since 2009.

Klaus Regling discussed the measures implemented in the past few years geared towards stabilising the euro and creating a crisis-proof eurozone architecture. Despite the rapid implementation of these measures, they were following a consistent logic, Regling said. These measures – some of which were very painful indeed, as Regling explained – had positive effects, which becomes evident from the return of Ireland, Portugal, and Spain to the financial markets. Regling added that the crisis policy has successfully eliminated the majority of the macroeconomic factors responsible for the sovereign debt crisis. He went on to say that the VIPS concept proposed by the ZEW researchers indeed touched on some important aspects; however, the implementation of a regulated insolvency procedure for sovereigns is not a top-priority matter on the current political agenda, Regling concluded.

In the third presentation, Nicolas Carnot agreed on Regling's opinion that the corrections made to the eurozone architecture should not be underestimated; albeit discussions on further reforms and the directionality of individual measures are legitimate. Moreover, Carnot stressed, work on the eurozone architecture is by no means finished. Further clarification is still needed in various fields, for example when it comes to the implementation of fiscal policy rules. The fundamental question whether to opt for centralisation or decentralisation yet also remains to be answered, Carnot added. With regard to the VIPS concept, Carnot positively highlighted its consideration of the still fragile situation in the eurozone by emphasising the importance of transition periods.

A lively panel discussion with numerous questions, comments, and some critical remarks from the audience concluded the ZEW Lunch Debate. The debate addressed, among other things, the question whether the crisis policy hitherto exercised has forwarded sustainable reforms or, rather conversely, reduced the pressure to reform economic and fiscal policy. The short-term effects resulting from the implementation of the mechanisms outlined in the VIPS concept and in other proposals were also discussed.          

The ZEW Lunch Debates series focuses on the general topic "Economic Recovery in Europe". The next ZEW Lunch Debate is scheduled for 25 September 2014 and addresses the question: "Are the Fiscal Responses to the Crisis Increasing Income Inequality and Wealth Disparity?"

More information about the ZEW Lunch Debates and forthcoming events in this series