Jean Pisani Ferry -The trilemma of Eurozone reform

http://www.bruegel.org/download/parent/674-the-euro-crisis-and-the-new-impossible-trinity/file/1540-the-euro-crisis-and-the-new-impossible-trinity/

This is a marvellously clearly written report. It concisely points out the problems with the current Eurozone approach, especially as regards a selective interpretation of the problem focusing exclusively on fiscal rules. It also makes a lot of poignant assessments of policy options and obstacles. It deserves to be read widely.

However, I'm not sure the "Trilemma" hypothesis is a comprehensive explanation of our problems. It explains well the lack of tools we have in confronting credit busts in Euro Area states and it proposes effective alternatives to equip ourselves to resolve them cheaply and more fairly -but does it help prevent credit booms to start with? It's not obvious that it does.

Secondly, though I am very much in favour of highlighting private debt booms as a more significant and thorny problem than the fiscal problems that Eurozone heads are grappling with -nevertheless this "trilemma" does not obviously assist with the problems of fiscal indiscipline.

Rather, I think both public and private debt bubbles should be accorded roughly equal importance in devising regulatory reforms. Indeed, I see the present crises as two sides of the same coin -inappropriate monetary policy in every single Member State (especially the small ones). In some countries this led to public largesse, in others private credit frenzies.

However, though I believe his proposed reforms, in conjunction with the fiscal rules currently under negotiation at Eurozone level, could do much to reduce the cost of private and sovereign crises respectively -nevertheless, the inappropriate monetary policy in each MS would remain. Misaligned incentives would still play on public and private decisions. Capital is either too cheap or too dear in every Member State and people and/or governments will find ways to mobilise it for their own ends. As soon as the ink is dry on these reforms, a continent of people would be seeking ways to bypass them. I fear that having slain these two particular monsters we could find a new hydra's head springing up in a few years time to bedevil us, sprouting from the same warped monetary policy source.

I would wholeheartedly endorse his proposals for breaking sovereign-banking interdependence. What Irish person could disagree with this after the horror of our own disaster? It only makes sense anyway. It also makes sovereign defaults less of a continentwide disaster -bringing credible moral hazard to bondmarkets.

All in all, a cracking read -and in plain, concise language. It presents reasonable ways to deal with credit busts, but I would also like to see something on prevention of credit booms as well.