Policy makers are currently working
towards the addressing the failings of the economic and monetary union in the Euroarea, but what were some of the early warning signs that perhaps should
have been addressed much earlier? True. There was extensive research on
the economics and monetary union in the early nineties at the time of the
Maastricht Negotiations and there were some clear warnings given by this research. Clearly it was perceived that
countries were in asymmetry situation and that there was a risk
those asymmetries developing that the common monetary policy with a single
interest rate was sort of a one size fits all monetary policy which could
be destabilizing. There were warnings about the fiscal situation. All those things where more or less known. The risks were known; the fact
that they could develop to the extent we’ve seen was not known, but the warnings were
there, so economist have done their job, in a way. Policy makers too often chose a sort of complacent reading of the
literature. For example, there was this idea of a optimum currency area, which it was not, but it can develop into one just by the fact that you’re creating a monetary union countries will become more symmetric, more similar. So the problems that were perceived as
potential risk would actually not develop. that with the poor complacent reading
and too often this kind of complacent reading was chosen because it makes things easier because
avoided hard choices. It avoided, after having made all the efforts to
qualify for a monetary union, to continue with reform efforts to make
the countries, the economies, fit for the Euro and for last basics of the Euro. What was then completely unforeseen? Well there were things that were not perceived as being threat
or a risk almost, almost nobody saw the possibility of financial disruptions, the account of capital, massive capital inflows followed by a
massive capital outflows from north to south Europe that we have seen a true balance of
payment crisis in the way. Interestingly there was in the treaty, there was a possiblity of providing balance
of payment assitance to countries in trouble, and then at the time of the
signing of Maastricht this possiblity was removed once you enter the monetary union. And the question is why? Because it was seen as you know there cannot be a balance of payment systems because there’s no balance of payment anymore. Countries are becoming like regions so, they will be by definition,everything will be
financed. What you’ve seen is that in fact it has not happened this way. Establishing EMU is a huge
undertaking and we’re starting with banking union but what are some of the
tools still to be explored? So since the decision in June on banking union, the on the direction taken and in the ECB on a decision on the OMT
so scheme to intervene and bond markets. This dimension of financial
fragmentation, balance of payment crisis has moved to the center of the
policy discussion whereas before until summer the whole focus was on the fiscal side which was a real concerned for some countries but certainly not sufficient to explain
what has happened. So there has been a recognition
of the deeper character of this crisis that leads to accept that monetary union as conceived in
Maastricht treaty was incomplete. That it was a neglect of the financial dimension and a
neglect of the financial risk it could involve. So I
think banking union is a big project we are just at the beginning. It’s
highly technical obviously but it involves many things if you go beyond supervision, the reversion of banking crisis, how you’re going to potentially mobilize fiscal
resources, and then the questions of what are the institutional implications of all of that. I think there is an important discussion that we are not having yet, the question of the labor mobility and that’s an old discussion in a way. We
should look at the way in the US adjustment between regions, between
states, that takes place is largely through labor mobility. In europe we’re used to thinking that there is very little mobility. In fact that there was more if you look at Ireland, if you
look at Latvia, if you look at Spain before the crisis with all the inflows of
people, there was more mobility already. In this crisis there was extremely high
unemployment rate in some parts of the Euroarea and some parts had full employment or close to full employment we may see much more people moving then we were used to and this may
trigger a whole discussion about what kind of economy is it that instead of bringing jobs to people as we usually think should happen maybe people will move to jobs and
that has a profound implications potentially.