Fiscal governance: How can the eurozone get what it needs?

Within the Eurozone's macroeconomic policy framework, fiscal policy was assigned the task of managing the level of fiscal deficits, and ensuring that the level of public debt was not too high. Within this framework, monetary policy was to stabilize the macroeconomy, wage and price setting was to ensure that countries remained sufficiently competitive in relation to each other, and financial liberalization was undertaken to enable integration of the peripheral European economies with their northern neighbours, thereby generating an increase in well-being. But, even before the onset of the global financial crisis, the competitive position of the GIIPS countries had become unsustainable, and financial liberalization had been grossly mismanaged. The onset of the global financial crisis has meant that interest rates have reached the zero bound so that monetary policy is no longer able to stabilize the Eurozone economy effectively. In these circumstances, fiscal policy needs to both help stabilize the economy, in a way not allowed by the Stability and Growth Pact, and also needs to play a part in ensuring the resolution of imbalances within Europe. For this to be possible, some of the sovereign debt of countries will need to be written down.