>> GROUP: Shadow ECB Council / EZB-Schattenrat  Dr. Thomas Mayer

Dr. Thomas Mayer: EMU was created with the expectation that the single currency would force countries to adjust to a hard budget constraint established by an independent central bank. Existing structural rigidities would be broken by the sheer force of this constraint. The expectation proved unfounded, countries did not adjust, EMU experienced a financial crisis and would have fallen apart, if the ECB had not promised to “do whatever it takes” to save it. However, the problems created by the lack of adjustment were not solved by the ECB’s guarantee, they were only moved from the financial to the political domain. Time was bought, but time is now up. Italy is confronting EMU policy makers with the choice of (1) enforcing the agreed hard budget constraint and letting EMU break up, or (2) accepting a soft budget constraint for countries unable to adjust in order to save EMU and putting the ECB under their fiscal dominance. In other words, the ECB will have to do “whatever it takes” to satisfy the financing needs of the Italian state and the banks, and I believe it will be enough to keep Italy in EMU. Time is bought again, until a “hard currency alliance” of EMU countries breaks out of the soft currency union. Such an alliance will most likely not be led by Germany, but it could be led by Netherlands, Austria or Finland. Germany would follow their lead, like it followed the lead of the countries that closed the Balkan Route to migrants from the Middle East.
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