Euro zone needs macroprudential, counter-cyclical fiscal policies- Hugo Dixon

September 28
11:28 AM 2013

Reuters News Editor-at-Large Hugo Dixon said the current one-size-fits-all fiscal policy employed in the Euro zone was a cause of the crisis. In his editorial, Dixon cited how setting an average interest rate for all members of the zone had the effect of making the economies in Spain and Ireland uncompetitive. When the property bubbles broke, the damage it inflicted on both countries was devastating.

To prevent a repeat of the damage that a single monetary can cause, he suggested pursuing what he calls as macroprudential policies and counter-cyclical fiscal policies. Macroprudential policies involved requiring banks to increase their minimum capital buffers and cutting the mortgages they can make. He said this would enable the banking system to survive a bust if it happened.

Counter-cyclical policies, meanwhile, involved taking the opposite of the pro-cyclical approach which led to worsening recessions. Dixon wrote, "[C]ountries should take exactly the opposite approach: running up fiscal surpluses in the good times and then allowing their budgets to go into deficit in the bad times." This approach would not only restrain booms, it would also give countries the funds to expand their fiscal policies instead of adopting austerity measures.

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