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European economic governance (Policy Brief 235 - September 2011)

European economic governance (Policy Brief 235 - September 2011)


European economic governance : What indicators should be used to prevent imbalances and reinforce convergence?

The crisis has revealed that even countries whose public finances were balanced before the crisis are subject to heavy financial imbalances.

Everyone in the euro zone agrees on the need to implement systemic- risk-prevention mechanisms that are more extensive than those currently provided by the Stability and Growth Pact.

This reform, passed by the European Council in March 2011, is currently being debated in the European Parliament and is part of a broader mechanism to reinforce macro-prudential surveillance in the euro zone. It provides mainly for the implementing of a procedure for preventing and correcting “excessive” macroeconomic imbalances and would formalise the widening of multilateral surveillance to criteria that are not exclusively fiscal.

However, while there is a consensus that such an extension is needed, there is still a debate on which indicators of imbalances to use.

As they currently stand, the proposals reveal at least two, nonexclusive interpretations of potential sources of instability within the euro zone: one blames excessive imbalances on gaps in competitiveness between member-states, while the other blames an expansion in credit along with a sharp increase in valuations of both securities and real-estate assets.

The purpose of this paper is to test the relevance and solidity of the indicators being reviewed and to submit proposals based on lessons learnt from previous crises.


  • preventing imbalances is the key to reinforcing European Economic governance
  • How relevant are competitiveness indicators for the zone Euro?
  • What financial indicators should be used for excessive imbalances?
  • Authors: Thomas Brand and Celine Mareuge, Economy-Finance Department
    With the support of Amélie Barbier-Gauchard , scientific advisor to the department Economy-Finance

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