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Neither the discipline of the financial markets nor the rules were able to prevent individual countries running up excessive debt and in order to safeguard financial stability in the monetary union as a whole, rescue packages were set up and central banks took various non-standard measures in order to stabilise the situation.
In order to achieve that, three things are necessary. First, government finances have to be put back in order; second, competitiveness has to be improved; third, the framework of monetary union has to be strengthened. Let us look at these three necessities in more detail.
1) Budget consolidation and structural reforms
Many euro area countries have very high levels of sovereign debt and reducing government debt appears to be an urgent necessity. The associated course of fiscal consolidation has come in for some criticism, however. It is argued that, especially in a crisis, too many austerity measures place an unnecessary drag on the economy. On one point, the critics are right: saving is not enough on its own, it is only part of the necessary structural reforms.
2) Countries have to reform their national economies so that they become competitive again
There is no ready-made solution for this; each country needs different reforms. There is one common denominator, however: The labour markets have to be made more flexible as flexible labour markets help enterprises to adapt quickly to changing conditions which is not only important in crises; it also promotes the overall pace of economic growth. All these reforms are painful and arduous. But they are indispensable and we are seeing initial signs of success.
3) A better architecture for the monetary union
Basically, there are two ways to realign the inherent imbalance: either the European level gains certain control rights over national budgets – which would mean a deeper political integration. Or we leave control of fiscal policy at the national level. But then the national level also has to assume liability for its policies – that would mean strengthening the Maastricht framework.
The first course would amount to what is known as a fiscal union. But that would depend on the countries of the euro area transferring national sovereignty to the European level – for example, by giving the European level the right to intervene in the case of unsound public finances. More than anything, such changes would need the support not only of policymakers but also of the general public. And, on this point, we should be realistic. It is not possible to identify any willingness to do that at present – not in Germany or in any other country of the euro area.
This just leaves the second course of action: that is, an improved Maastricht framework, a "Maastricht 2.0". Among other things, that means strengthening the rules on borrowing and taking the no bail-out principle more seriously again. But that calls for the possibility of sovereign default as the ultimate logical conclusion of individual responsibility. Sovereign defaults have to be possible without destabilising the financial system of the euro area as a whole.
The banking union as part of a better architecture
The banking union consists of two elements. One element is joint banking supervision for large banks, the Single Supervisory Mechanism. But that cannot entirely rule out the possibility of bank failure and therefore, measures have to be taken to ensure that banks can fail without placing a strain on government finances. And this is where the second element of the banking union comes into play: a single resolution and restructuring mechanism for banks. And that, too, is under development at present.
Properly equipped, the banking union is thus a key component of a stable monetary union. With the banking union, government finances will be better protected in the future against crises in the banking sector.
The role of monetary policy
Monetary policy has already played a big part in helping to contain the crisis. But it cannot resolve the crisis – everyone is in agreement on that. And, with the measures taken so far, it has already ventured far into unknown and dangerous territory.
It is no secret that the Bundesbank takes a critical view of the ECB’s government bond purchase programmes in particular. If Eurosystem central banks buy government bonds issued by countries with poor credit ratings, the risks of an unsound national fiscal policy will be spread across all the euro-area states.
All that monetary policymakers have done so far has bought time for governments to solve the crisis. It is now up to governments to use that time, because monetary policy measures are not without risks and side effects. We should be aware of that. The euro is not only an economic project. It is also a political project. It is an important building block of a united Europe. Not least for that reason, it is something that is worth fighting for.