Europe beyond markets

The euro was planned during a period in which economic policy making was driven by a deep belief in market liberalism and the near impossibility of systemic financial crises. This belief has been brought into question since the euro crisis, which showed that panics do happen. New thinking needs to focus on developing mechanisms to protect eurozone countries from such panics and to foster economic convergence between members.


New Paradigm Knowledge Base

  • The Challenge

    The ECB’s continuing program of bond purchases and its emergency lending to struggling banks show the underlying instability of the eurozone.

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  • What went wrong?

    A deep belief in self-regulating markets and market-driven integration failed to lead to convergence. It instead led to divergence and major imbalances.

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  • New Economy in Progress

    New research focuses on the policies – macroeconomic, institutional and regulatory – needed to ensure convergence, prevent shocks and improve crisis management.

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5 ways that are discussed to strengthen Europe:

  1. Make the ECB’s role as lender of last resort an explicit part of its mandate, not an implicit political deal as it is at present.
  2. Establish a common European safe asset in place the current de facto safe asset - the 10-year German government bond.
  3. Establish pan-eurozone deposit insurance and with it the risk of deposit flight, and self-fulfilling runs on banks.
  4. Reform fiscal rules so that governments are not forced to cut spending in economic downturns.
  5. Introduce much tougher penalties for countries running persistent trade imbalances, be they surpluses or deficits.

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