Don’t Rule it Out: Simplifying Fiscal Governance in Europe

By Petya Koeva Brooks and Gerd Schwartz

The 2008 global financial crisis and its aftermath have tested the European Union’s (EU) fiscal governance framework—the rules, regulations, and procedures that influence how budgetary policy is planned, approved, carried out, and monitored. Given the distinctive nature of EU integration, the framework aims to discipline national fiscal policies to prevent adverse spillovers to other countries and distortions to the conduct of the euro area’s common monetary policy.

The build-up of fiscal imbalances, however, revealed gaps in the framework. Public debt in the European Union soared following the crisis in 2008 to an average of around 95 percent in 2014—almost 30 percentage points above its average pre-crisis level (Chart 1).

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Securitization: Restore Credit Flow to Revive Europe’s Small Businesses

By Shekhar Aiyar, Bergljot Barkbu, and Andreas (Andy) Jobst

If financing is the lifeblood of European small businesses, then the effect of the financial crisis was similar to a cardiac arrest. The flow of affordable credit from banks was choked off and small and medium-sized enterprises (SMEs) were hit hardest. Today, with bank lending still recovering from that shock, smart policy actions could open up securitization as a source of financing to help small businesses start up, flourish and grow.

SMEs are vital to the European economy. They account for 99 out of every 100 businesses, two in every three employees, and 58 cents of each euro of value added of the business sector in Europe. Improving access to finance would therefore not only revive small businesses, but also support a strong and lasting recovery for Europe as a whole.

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Toughing It Out: How the Baltics Defied Predictions

By Christoph Rosenberg

Two years ago, the eyes of the financial world were not on Europe’s Western periphery but on its North-Eastern corner. The three Baltic states—Estonia, Latvia and Lithuania—were among the first victims of the global financial crisis.

After a spectacular boom, with several years of Chinese-style growth rates, these small and open economies faced an equally spectacular bust. Credit―and with it property prices, consumption, and investment―collapsed. Exports were hit by the global depression. And the financial sector came under severe stress. Indeed, Latvia was forced to nationalize its largest domestic bank and had to ask for a bailout from the European Union and the IMF.

The conventional wisdom at the time was that these three countries would have to give up their long-standing currency pegs against the euro and devalue. After all, this is what countries facing a trade and financial shock most often choose to do.

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