Thomas Palley

As part of the euro’s introduction, European governments agreed to constrain their budget policies through the Growth and Stability Pact. Though euphemistically termed the “growth and stability” pact, it in fact delivers neither. Moreover, owing to the constraints the pact places on national economic sovereignty, it risks contributing to political strains that threaten to undermine support for the euro. For these reasons, it is time to abandon the pact. In its place, Europe should let democracy and financial markets arbitrate the long-term viability of government fiscal policies. (more…)

The establishment of the euro represents an important step in the creation of an integrated European economy. Over time it should yield dividends as increased competition and lower transaction costs generate increased efficiency. However, member countries have had to give up their own exchange rates and interest rates, which has created problems for economic management by reducing the number of policy instruments. In particular, the European Central Bank (ECB) must wrestle with how to set interest rates when some countries are booming, while others suffer high unemployment. Asset based reserve requirements (ABRR) can fill this policy instrument gap. (more…)