The Structure of Institutional Reforms

FRANKFURT – Despite abundant talk in Europe nowadays, there is no crisis of the euro. Some countries, instead, are dealing with a sovereign-debt crisis and the consequences of inadequate economic reform. The challenges are characteristic not only for the euro area. Most advanced economies around the globe are facing similar problems.

All countries need to draw firm conclusions from the current crisis. In the euro area, instead of continuing to deny that monetary union limits national fiscal sovereignty, they must come to terms with economic reality and follow stricter budgetary rules.

When the global financial crisis erupted, the euro shielded countries that in comparable circumstances would have been plunged into a deep currency crisis. This shield may, perhaps, have worked too well because the more weakly performing countries faced no discipline from financial markets.

Indeed, despite massive imbalances and huge disparities in the level of private and public debt across the euro area, interest-rate spreads on government bonds disappeared in the run-up to the crisis. Market participants – including ratings agencies – either flagrantly misapprehended risk or never took the Maastricht Treaty’s no-bailout clause seriously.