The financial crisis requires “exceptional policy responses in order to preserve jobs, livelihoods, financial stability and ultimately political support for open markets,” write Jean Pisani-Ferry, André Sapir and Jakob von Weizsäcker of the Bruegel think-tank in a November paper.
As far as Europe is concerned, the experts state that action should be “coordinated in order to ensure consistency and avoid free-riding behaviour”. “The more open the economy is, the more governments would be tempted to free-ride and rely on their neighbours’ stimulus,” they argue.
However, the authors admit that coordinating action will not be easy, especially given that such cooperation would be “among a large number of countries”. Furthermore, they complain that economic coordination is a complicated task because “some countries are in relatively good budgetary shape, whereas others, which already recorded significant structural deficits before the downturn, now find themselves in trouble”.
The experts are deeply concerned that a budgetary stimulus could “undermine European public finances at a time when the markets are wary of risk”.
To get to the bottom of the crisis, the authors argue that the European Union should “combine a substantial coordinated stimulus with measures that improve the long-term sustainability of public finances”.
In their view, this should take the form of an “ad-hoc EU agreement” to reform public finances in member states that overrun their budgets, speed up the application of the Stability and Growth Pact (SGP) and commit governments to borrowing at low interest rates only.
Such temporary strengthening of budgetary surveillance would pre-empt the emergence of unsustainable positions. On balance, the experts believe that the markets “would be reassured by such a backstop process”.
The authors conclude that this ad-hoc agreement could adopted by the Council in December 2008 and “evaluated by 2011 with a view to formally incorporating them into the Stability and Growth Pact once they have passed the test of the current crisis”.