Monday, October 31, 2011

The Eurozone needs exit rules

by Christian Fahrholz and Cezary Wójcik


October 31, 2011

With the sovereign debt crisis spreading across Europe, there is no shortage of suggestions on how to save the Eurozone. This column says exit rules are the silver bullet. It argues that exit rules would decrease the probability of a breakup of the Eurozone by enhancing market discipline, increasing the political bargaining power of EZ members vis-à-vis the profligate countries, enhancing internal discipline in the profligate countries, and reducing market uncertainty.

With the sovereign debt crisis spreading across Europe and in the run-up to the next EU Summit there is no shortage of suggestions on how to save the Eurozone. Unfortunately, the majority of these suggestions have one of the following flaws. Either they address the long-term challenges without dealing with the short-term stabilisation problems (for example, Cooley and Marimon 2011) or they address the short-term stabilisation issues at the cost of the Eurozone’s long-term sustainability (de Grauwe 2011, and Delpa and Weizsaecker 2011).

But there is one solution that would achieve both and would also provide added benefits. The Eurozone needs Treaty provisions on ‘exit rules’.

Not – we emphasise – because Greece or some other member state should be thrown out, but because such exit rules would strengthen the Eurozone. They will strengthen it through four channels: i) improved external market discipline, ii) strengthened internal macroeconomic discipline, iii) increased enforcement power of the Eurozone over profligate members, and iv) reduced uncertainty. As such, such exit rules would decrease (and not increase!) the probability of an exit, or the breakup of the Eurozone. Why?

The notion supported by EU officials and currently embedded in the EU legal framework that leaving the Eurozone is impossible may speak to political aspirations, but economically they are harmful. This has been a key source of the imbalances within the Eurozone and is now at the core of today’s difficulties in resolving the crisis.


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