1. The Eurozone after Stress Testing Charles Wyplosz The Graduate Institute, Geneva The Israeli Association for the Study of European Integration Annual Conference October 11-12 2015

2. Stress Testing Two crises have shown the Eurozone resilience  Reasonably good performance over 2007-9  Terrible policies since 2010, but Eurozone still whole Always been known that asymmetric shocks are difficult to handle  And what a shock! The sovereign debt crisis has exposed 6 flaws  Most of them were well identified

3. Flaw No. 1: Fiscal discipline Well understood requirement Wrong solution: the Stability and Growth Pact Arbitrary rule and impossible sanctions: no teeth Fundamental conflict with national sovereignty Repeated failures led to:  First, more flexibility  Second, more rigidity  Bureaucratic monster Concept must be changed

4. Flaw No. 2: The banking system One money, one central bank, one banking system  One set of regulations  One supervisor  One resolution authority Bank crises can be very costly  The ostrich policy The crisis led to Banking Union  Great progress  Work not completed

5. Flaw No. 3: An incomplete central bank Many impediments  Fear of redistribution  Divergent national views  Different national cyclical needs The ECB was expected to defend collective interest The ECB was paralyzed and made huge mistakes  Bailout of Greece, refusal to write debt down  Failure to back sovereign debts  Behind the curve

6. Flaw No. 4: Sovereign debt relief Some public debts were too large No mechanism for debt relief  National interests in the driving seat The situation has grown much worse  National politics in the driving seat Stealth solution for Greece  No framework in place

7. Flaw No. 5: Intrusiveness Many countries suffer from economic mismanagement  Continuous budget deficits  Continuous external deficits  Unreformed sclerotic economies Budget deficits: an essential common concern External deficits not an issue once fiscal disciple is established  Private borrowers and lenders are consenting adults Reforms: a deeply sovereign issue Programs and processes are intrusive

8. Flaw No. 6: Governance Community method has disappeared Intergovernmental method cannot work  19 ministers unable to make decisions Emergence of an hegemon: Germany  A deeply conflicted manager

9. Conclusion One problem (half) solved The others remain They are now recognized  But hard to solve Political Union cannot be the solution It takes decade to forge institutions