The Euro Zone Needs an External Stability Pact

Abstract:

There is widespread concern in the European Monetary Union (EMU) about the sustainability of public finances in a number of member states. In the wake of the financial crisis, their public debt has increased dramatically.

Rating agencies have already downgraded some countries' credit ratings, and markets are reacting with higher risk premiums. It is not impossible that certain countries will become insolvent - which could make it necessary for others to assume their debts.

This situation has reignited debate on the reform of the Stability and Growth Pact. Yet, as the repercussions of the global crisis show, relying on the rules controlling public deficits and debt may not be enough to prevent the insolvency of member states.

Excessive external imbalances of some countries pose a serious danger to the stability of the European Monetary Union. These deficits need to be monitored on the European level in order to mitigate risks as early as possible. An 'External Stability Pact' could provide an effective framework for this, complementing the existing body of EMU regulations. Adherence to the provisions of the pact should be made a condition for future enlargements of the Euro zone.