Lucrezia Reichlin for PS Say More

The PS Say More Newsletter | [View this message in a web browser]( [PS Say More]( Welcome to Say More, a weekly newsletter offering readers exclusive insights into the ideas, interests, and personalities of some of the world’s leading thinkers. In each issue, a Project Syndicate contributor is invited to expand on topics covered in their commentaries, address new issues, and share recommendations about everything from books and recordings to hobbies and social media. This week, Project Syndicate catches up with [Lucrezia Reichlin]( a former director of research at the European Central Bank. Lucrezia Reichlin Says More… Project Syndicate[Lucrezia Reichlin]( In March, you [wrote]( that, to counter the economic consequences of the COVID-19 pandemic, the eurozone needs a “coordinated fiscal stimulus that takes advantage of its joint-financing power,” managed by a powerful new crisis-management mechanism. In an ideal world, what would such an “insurance fund” look like? If, in practice, it proves to be a political non-starter, as it did after the euro crisis a decade ago, are there ways to repurpose existing institutions to manage a fiscal response today? Lucrezia Reichlin: The eurozone is facing a fundamental policy asymmetry: the monetary authority is federal, whereas fiscal policies are national. In crises, the European Central Bank plays a disproportionate role in the adjustment. This is ineffective, especially when interest rates are at their effective lower bound. And it may lead the ECB to do too much, raising questions about its legitimacy, as exemplified by the German Federal Constitutional Court’s [recent ruling]( against the ECB’s pre-pandemic [asset-purchase program](. A shared fiscal mechanism would reduce vulnerability to sovereign risk in debt issuance, and help to ease the constraint on using fiscal accommodation to respond to large shocks. In an ideal world, this could be achieved by a stabilization fund issuing non-defaultable debt such as Eurobonds or some hybrid instrument backed by a pool of eurozone sovereign bonds. There are various ways such a fund could be designed; but, fundamentally, it would require a degree of risk-sharing that national governments are not yet prepared to accept. This is understandable: a higher degree of political union would be essential for such a fiscal mechanism to have the needed legitimacy. So, for now, there is little chance that it will be implemented. Nonetheless, there is some degree of risk-sharing and flexibility in the pandemic-response mechanisms that have been implemented: the European Stability Mechanism’s special credit line for health-related expenses and the European Commission’s credit line for temporary support to mitigate unemployment risks. Moreover, fiscal rules have been temporarily relaxed, and a recovery fund is under discussion. So, in the end, we will make some progress via existing institutions. It will be insufficient, but it will be progress. PS: Examining the issue of EU countries’ adherence to the bloc’s fiscal rules, you [proposed]( back in 2018 that policymakers should focus on “limiting the externalities of fiscal decisions taken by fragile member states.” Had such a system been adopted, would countries be in a worse position today, given that, as you recently noted, “allowing member states to run larger fiscal deficits” is essential to cope with the pandemic? And, looking ahead, how would such an approach advance the goal of closer coordination in times of crisis? LR: In a monetary union, a mechanism to limit these externalities is needed. But it must work in both directions: deficits and surpluses. Crises demand coordinated counter-cyclical fiscal policy. A common fiscal capacity is essential to enable such a policy, including by ensuring that highly indebted countries are not constrained in their ability to use budgetary measures to support demand. In other words, in such situations, countries must be able to run fiscal deficits without risking a debt crisis. But this cannot work if countries are allowed to build up huge amounts of debt in normal times. That is why Europe also needs a framework that limits moral hazard in normal times, though I think that the current fiscal rules do not work. To read the rest of our interview with Reichlin – in which she identifies the pillars of a new EU governance framework, discusses big data’s potential (and limits) for economic forecasting, and offers advice to graduates starting their careers during a severe economic downturn – [click here](. If you are not yet a PS subscriber, [subscribe now](. PS Topic [The COVID-19 Crisis]( All the latest insights and analysis on the escalating – and evolving – pandemic from PS commentators. Previously in Say More [Carlos Lopes]( – High Representative of the African Union for partnerships with Europe and a member of the Global Commission on the Economy and Climate – shows how the COVID-19 crisis could be used to entrench a green agenda in Africa, worries that Europe could cut aid to the continent, and calls for debt relief. [Read more](. [Shang-Jin Wei]( – a former chief economist at the Asian Development Bank – urged countries to reduce trade barriers, offered a baseline scenario for China's economy in 2020, and highlighted what Chinese and Americans are missing about each other. [Read more](. Project Syndicate publishes and provides, on a not-for-profit basis, original commentary by the world's leading thinkers to more than 500 media outlets in over 150 countries. This newsletter is a service of [Project Syndicate](. 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