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Comments on Amtenbrink & De Haan

Comments on Amtenbrink & De Haan. DNB workshop on Macroeconomic Imbalances in the Euro Area 13/14 October 2011 Jeroen Hessel Senior Economist De Nederlandsche Bank. Outline paper eurobonds: legal & economic view. Failure of current governance: enforceability

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Comments on Amtenbrink & De Haan

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  1. Comments on Amtenbrink & De Haan DNB workshop on Macroeconomic Imbalances in the Euro Area 13/14 October 2011Jeroen HesselSenior EconomistDe Nederlandsche Bank

  2. Outline paper eurobonds: legal & economic view • Failure of current governance: enforceability • Eurobonds to i) increase budgetary discipline and ii) avoid market speculation • Feasibility under current European and national (German) law

  3. Main comments: balance law & economics • Enforceability is very important, but not the only problem. That is a simplification. • If enforeability is the only problem, why far-reaching proposal to introduce eurobonds?

  4. Enforceability (i): starting positions • Rules were insufficiently enforced for several peripheral countries, but not for all of them

  5. Enforceability (ii): deficit increase

  6. Enforceability (iii): debt increase

  7. Enforceability (iv): conclusion • Enforceability should definitely increase • But financial crisis was a very big shock • Role of “forgotten” macro-imbalances • Rules cannot foresee all future problems • Budgetary problems never fully excluded

  8. Eurobonds (i): what reason? • If enforceability is key, why eurobonds? • Why should we prevent market speculation?  Asian crisis, Latin American debt crisis • Key reason: is a monetary union different?

  9. Eurobonds (ii): EMU seems special

  10. Eurobonds (iii): why is EMU special? • Political effectiveness? • Macro-imbalances and competitiveness • Larger risk of contagion • Deeper financial integration • Many countries in a similar position • De Grauwe (2011) inherent instability in EMU: • No exchange rate, monetary policy, lender of last resort

  11. Eurobonds (iv): conclusion • Main reason eurobonds: • Budgetary and macro-rules never prevent all future budgetary problems • EMU inherently unstable once this leads to doubt about debt-sustainability

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