Comment on “Fiscal Challenges in the Euro Zone”

• Author: Sahoko Kaji
• Date: 01 December 2012
• DOI: http://doi.org/10.1111/j.1748-3131.2012.01232.x
• Published date: 01 December 2012

Comment on “Fiscal Challenges in the

Euro Zone”

Sahoko KAJI†

Keio University

JEL codes: F36, H63

Campa (2012; p. 195) starts by pointing out that the euro area is in crisis because of three

unique characteristics; “the uneven distribution of the debt burden across the euro area;

(doubts over) the ability to finance that debt burden in the short run; and the concerns

on future growth as a mechanism to dilute the debt burden in the future”(Campa, 2012;

p. 183).

In relation to these three characteristics, Campa asks three questions, two of which

are of short-run nature. One of these is how to resolve the debt crisis (mainly in

Greece); the other is whether basically solvent Spain and Italy will be able to avert a

debt crisis.

The third and longer-term question is how to make the euro area uniformly com-

petitive and growing. This question is actually one that the European Union (EU) has

been asking almost since its inception, whose urgency intensified because of the crisis. To

resolve this third question, many member states must undergo painful reforms. Without

them, Europe cannot enjoy sustainable prosperity; no matter how the short-run ques-

tions are answered. This question is therefore very much relevant to Asian readers; what

kind of mechanism will Asian countries employ in order to push forward necessary but

domestically unpopular reforms? It is easy to criticize Europe for having introduced a

single currency without a single fiscal authority. But if Europe’s way is the wrong way,

what is the alternative?

This question is directly related to one important reason why the euro was intro-

duced in the first place. The euro meant “hiring a conservative central banker”, more

fiscal prudence, and cost/price transparency. Thus, the euro was expected to make it

easier for member states to implement unpopular reforms, by taking away the easy

policy choices, and by revealing rigidities which were hampering growth. It was hoped

that members would converge toward more flexibility and better economic health. But

this convergence failed to materialize, asymmetries remained, and naturally the euro

got in trouble. Fixing or doing away with the exchange rate does not work well under

asymmetries.

As shown in Campa’s paper, overthe last 2 years, Europe has been conducting a large

number of reforms. As most of these measures intrude upon vested interests and/or

†Correspondence: Sahoko Kaji, Keio University,2-15-45 Mita, Minato-ku, Tokyo 108-8345, Japan.

Email: kaji@econ.keio.ac.jp

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doi: 10.1111/j.1748-3131.2012.01232.x Asian Economic Policy Review (2012) 7, 198–199

© 2012 The Author

Asian Economic Policy Review © 2012 Japan Center for Economic Research

198