The Trilemma of the European Monetary Union

The Trilemma of the European Monetary Union


A fragile boat made from a €20 bill, maintaining balance on a compass – this is the representation of a fragile Eurozone in the cover of The Man Inside. A European Journey through Two Crises (UBE, 2021), Marco Buti’s latest book. Buti, Director-General for the Economic and Financial Affairs at the European Commission, presented his book at the IGIER policy seminar on February 17th, 2022. The book is a tale on the construction and strengthening of the European Monetary Union (EMU). It traces the path of the EMU and its ability to meet key challenges. Being the man inside, Marco Buti reflects on the formation of the EMU, its diversity, the numerous trilemmas and opposing forces that it faces as well as its past, current and future challenges.
Professor Mario Monti in his opening remarks, argued that crises are twice alarming for monetary unions; first, because of their direct economic impact. Second, because they might impair the Union and its chances of survival. Marco Buti, Prof. Monti continued, had to face this situation twice; during the 2008 financial crisis, and during the more recent COVID-19 pandemic crisis.
In his presentation of the book, Buti argued that the evolution of the EMU can be illustrated by the EMU’s policy mix trilemma that it had to face since its creation. In this trilemma, Buti argues that the EMU cannot face the three of those at the same time; asymmetric proscribing fiscal rules, no central fiscal capacity and monetary policy at the Effective Lower Bound (ELB). As suchButi distinguishes three periods – the first and second decade and the current period since the COVID-19 pandemic – each of them characterized by one side of the trilemma. Hence, the story of the EMU is also the story of how this trilemma has been seen by policy makers.
He also emphasized on the relevance of the Recovery Resilience Facility (RRF). In virtue of its reliance on trust, sustainable growth, leadership and autonomy, in Buti’s view the success of the RRF is fundamental in allowing the EMU to progress to the next step of its development. Finally, The Man Inside draws six lessons from this in between crises, giving rise to implications and possible economic governance reforms. In particular, Buti emphasizes on avoiding “inverted pyramids”, partial equilibriums, and complete contracts, which all arise from the heterogeneity of member states. Our history in between the two crises also taught that the journey between the beginning and the destination may not be a straight line, that ‘red lines’ can be crossed and that we should avoid the “Japanese holdout”.
The discussion led by Professor Elena Carletti and Professor Daniel Gros and moderated by Professor Franco Bruni highlighted the main points brought up in The Man Inside, namely the dire need to build and strengthen trust among member states and overcome the risk reducing vs. risk sharing issue. While recognizing the role of the Commission as a body that both plays a referee between member states and a consensus builder, it appears that the ability of member states to find a middle ground and set up a united front is of paramount importance for the future of the Eurozone. As countries made progress in this area when providing a response to the COVID-19 induced crisis, observing whether this cooperation and the lessons learnt in the in-between of the two crises will be used in implementing the Next Generation EU successfully, will be a great indicator of the future health of the Eurozone.
In all, with The Man Inside, Marco Buti shares with us a tale of an evolving EMU, a union that had to overcome many challenges and has managed to impose itself as an important world player. Yet, completion of the Union is far from being complete; whether the lessons learnt from the two crises that the Union had to face will be used accordingly will be able to tell whether the Union will merely survive in a constant evolving and more challenging world, or on the contrary flourish and become greater.

by Laure Anique
Bocconi Knowledge newsletter


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