The EU Economic Governance Framework and the Issue of Debt

The Maastricht Treaty introduced the Economic and Monetary Union (EMU) based on a supranational pillar covering the monetary policy and on an intergovernmental pillar covering the coordination of entirely national economic and fiscal policies. This construction relies on the assumption that the disappearance of monetary policy measures to remedy excessive government deficits would discipline Member States’ spending policies. In addition, the European level should only guarantee that Member States do not enter into excessive deficits and debts. The recent economic crisis unveiled the weaknesses of the Maastricht EMU construction and its underlying assumptions. Some Member States piled up debt in such an excessive manner that they were not able anymore to refinance themselves on the private markets. Reforms of the EMU’s economic governance framework made in the aftermath of the peak of the crisis tightened the margin of public spending without addressing the issue of reducing excessive debt within the tightened limits of the reformed framework. In this context, the idea of establishing a European Redemption Fund (ERF) was put forward, into which all government debts amounting to above 60% of Gross Domestic Product (GDP) would be transferred, and where participating Member States would be obliged to redeem the transferred debt over a fixed period of time. This idea can be realised within the existing Treaty boundaries and would not violate the so-called “no bail-out” clause. It would put overindebted Member States in a position to comply effectively with the reformed economic governance framework.