Policies and proposals to guard against financial crises
The world economic crisis is almost a decade old, putting pressure on EU institutions and mechanisms to avoid another meltdown. The bloc’s economic governance and the risks that EU Member States are facing, along with the complexity of the eurozone, are posing many questions regarding how best to address financial challenges. With this in mind, the EU-funded RASTANEWS (Macro-risk assessment and stabilization policies with new early warning signals) project investigated how the evolving system of economic governance in the EU affects economic stability. It aimed to support policymakers in boosting macroeconomic and monetary integration in Europe based on better governance of the Economic and Monetary Union (EMU). The project team rethought the workings of the EU’s macroeconomy while taking into consideration informally inefficient financial markets, as well as stakeholders’ expectations in relation to asset prices. It also examined ways to address the inherent challenges between short-run and long-run policy prescriptions. Another important project objective involved examining a new system of early warning indicators that is part of the EMU surveillance mechanism. This involved studying EMU weaknesses that appeared after the crisis, such as elements that hamper a uniform monetary policy throughout the eurozone and impede the coordination of fiscal policies. It also included the misuse of fiscal policies as countercyclical buffers. The new set of ex ante indicators – or early warning signals – of impending macroeconomic and financial imbalances help national and European policymakers pre-empt financial crises and rebalance national economies when needed. In addition, key project outputs include proposals to reform EMU macroeconomic policies to mitigate possible future crises and proposals to reform EMU macro-prudential policies while strengthening the banking union. This ultimately shelters the Monetary Union from a negative feedback loop of financial crises and from inter-country contagion. The policy recommendations emerging from the project have been compiled in a Green Book.
Keywords
Economic governance, economic crisis, RASTANEWS, macroeconomic, EMU, banking union