You have probably heard it often enough: the worst of the crisis is over. Indeed, financial markets have excessively celebrated Mario Draghi’s “whatever it takes”, structural reforms in peripheral countries are starting to bear some fruit and confidence indicators have improved somewhat. However, as with every severe marital quarrel, avoiding a break-up is not an automatic return to normal. It often needs long-term counselling and effective action to avoid repeating the mistakes of the past. Returning to the euro crisis, the counselling has led to another make-over of the fiscal framework, giving the European Commission additional powers and an ever more decisive role. The former paper tiger has become an unchained watchdog. However, we think it will use its new powers carefully, balancing between austerity pragmatism and restoring credibility of the fiscal framework. A shift away from nominal results to structural adjustment could be the new fudge.
Here's a longer note on the Eurozone's fiscal framework and the role of the European Commission.