The following contribution is authored by Jürgen Stark, former vice-president of the Deutsche Bundesbank and a member of the executive board of the European Central Bank.
"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 of 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.
Meanwhile, the institutional mechanisms implemented for coordination of economic and fiscal policies remained idle. On the fiscal side, the rules of the Stability and Growth Pact were even weakened, and the decisions on adjustment measures and possible sanctions became dependent on short-sighted political considerations.
As long as Europe's potential sinners continue to judge its de facto sinners, peer pressure will not work. Indeed, deficit-reduction programs were all too often founded on overly optimistic growth assumptions, and in times of robust economic growth, debt reduction was neglected. Reliable statistics were not available in all countries, and for years there was no political will to protect public budgets from the impact of rapidly ageing populations on pension and healthcare costs."
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(Published in partnership with Project Syndicate.)