12 February 2014

IMF/Moghadam: Maastricht and the crisis in Europe - Where we've been and what we've learned

The ECB/NBB Conference, "Progress through crisis?", took stock of the presuppositions about what it takes to deliver financial stability and an enduring EMU. Progress has certainly been made but Europe still has much work to do on some of the post-Maastricht adaptations.

Moghadam advances the following line of argument:

• The Maastricht mindset saw fiscal indiscipline as the primary risk to the viability of the euro. Hence, its preoccupation with fiscal rules and no bailout clauses.

• But the pernicious forces at work before the crisis were not just about fiscal indiscipline, but more so, financial market indiscipline which priced risk more or less uniformly across the euro area and allowed, via banks, the build-up of large cross-border debts.

• When the crisis hit, the unsustainability of these private sector imbalances became apparent, threatening to bring down the banking system. It was assumed that private imbalances would remain a private sector problem, but instead some of this became public sector debt.

• The reality of the crisis has realigned the mindset. An explicit regime for bailout using ESM was invented. Fiscal rules were adapted and recast in structural terms. The need to monitor current account imbalances and other balance sheet weaknesses was recognised.

• Most importantly, rules are being developed to instil financial market discipline and ensure adequate burden sharing between the public and private sectors. Unified supervision, a resolution mechanism, clear bail-in rules, and a common backstop for bank resolution are critical elements.

• Progress has certainly been made, but Europe still has much work to do on some of these post-Maastricht adaptations if it is to lay the basis for stability and growth.

Europe at the crossroads

In the words of Robert Schuman’s 1950 proposal for a European Coal and Steel Community: "Europe will not be made all at once, or according to a single plan. It will be built through concrete achievements which first create a de facto solidarity." As bad as the crisis has been—and it has been extremely damaging with the crisis response far from ideal—one should not lose sight of the fact that Europe has responded with more solidarity and greater integration. If political will can be maintained, further integration coupled with steps to boost growth can create a more durable foundation for continued prosperity in the region.

Full article

© International Monetary Fund