Research and Publications
Exit: Time to Plan
Jürgen von Hagen, Jean Pisani-Ferry, Jakob von Weizsäcker
As the crisis recedes and economic growth resumes, budgetary policy, monetary policy, and policies addressing the financial sector will have to move out of crisis mode and back towards normality. This paper attempts to define such an exit strategy. To do so, it first assesses the desirable order and pace at which the extraordinary support measures should be withdrawn. Second, it explores how the proper incentives can be put in place at European level for such an exit strategy to be implemented in coordination between the various institutional actors. On that basis, a set of recommendations is put forward:
· Bank recapitalisation and restructuring should be completed in all EU countries as a matter of urgency. In order to provide member states with suitable incentives for this, the European Commission and central banks should provide clear deadlines for the phasing out of liquidity support and guarantees. Furthermore, for a limited time until 2014, debt levels should be calculated net of bank capital held by governments, to accommodate bank recapitalisation within the European fiscal framework.
· In view of the public finance costs of large deficits, budgetary consolidation should be given priority over monetary tightening. For this to succeed, governments need to start fiscal consolidation swiftly in 2011 with the withdrawal of the stimuli. Consolidation should be continued steadily through a 'European Sustainability Programme' for the next five years, to be adopted by the European Council in spring 2010.
· The enforcement of budgetary consolidation is to be achieved through the Stability and Growth Pact, guaranteeing consolidation rates of at least 0.5 percent of GDP per annum. Within the framework of the European Sustainability Programme, each government should present to its parliament by summer 2010 a medium-term budgetary plan that includes a debt target for end 2014 as well as annual minimum and maximum consolidation objectives.
· EU governments and central banks should make a one-off commitment to coordinating their exit
strategies, in order to prevent a double-dip recession while ensuring a timely exit. The framework for such
a temporary (e.g 2.5 years, renewable once) coordination mechanism could be set up under Art. 100 of the
· Central banks, and especially the ECB, should send clear signals to budgetary authorities about the extent of fiscal consolidation required to avoid a premature monetary tightening. However, central banks should stand ready to increase interest rates to fend off potential inflationary threats as they emerge.
· In order to avoid the build-up of financial instability in the context of exceptionally low short-term interest rates, preparations should be speeded up for the creation of the ESRB and for the definition of a macroprudential policy framework. Ideally, both the institution and the operational framework should be in place by summer 2010, not least to supervise a well-timed phasing-in of more stringent and anti-cyclical buffers for banks.
Jürgen von Hagen & Jean Pisani-Ferry & Jakob von Weizsäcker, 2009. "Exit: Time to Plan," Essays and Lectures 343, Bruegel.