"Maastricht and the Crisis in Europe: Where We've Been and What We've Learned," By Reza Moghadam, Director, European Department, IMF
IMF News, February 12, 2014
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Bibliographic details
- Authors: Reza Moghadam
- Published: February 12, 2014
Context and purpose
- Speech delivered by Reza Moghadam, Director, European Department, IMF, at ECB/NBB Conference: “Progress through crisis?” Brussels, Wednesday, February 12, 2014.
- As Prepared for Delivery: assesses Maastricht design assumptions, how the euro-area crisis exposed gaps, and lessons for strengthening EMU architecture.
Core argument and diagnosis
- Maastricht mindset: fiscal indiscipline viewed as the primary risk; emphasis on fiscal rules and a “no bailout” clause intended to preserve fiscal sovereignty while relying on market discipline.
- Crisis reality: financial market indiscipline and large cross-border private-sector debts were central drivers; private imbalances became public through bank bailouts and output losses.
- Key observations:
- The Maastricht framework emphasized fiscal rules (debt and deficit limits) and “no bailout” to induce market discipline.
- Practice diverged from theory: some countries (e.g., Greece and Italy) entered EMU despite not meeting original public debt criteria; compliance with fiscal rules was spotty.
- Market discipline weakened as sovereign yields converged to nearly identical low rates despite diverging net foreign asset positions.
- At the height of the crisis in 2011, dispersion of bond yields reemerged when the survival of the euro area was in doubt; authorities ultimately acted to preserve the union.
- Private sector leverage and current account imbalances signaled vulnerabilities that translated into weaker post-crisis growth, lower consumption growth where household leverage was higher, lower investment growth where corporate leverage was higher, and bank balance-sheet shrinkage where pre-crisis leverage was high.
- Financial supervision, resolution, and lender-of-last-resort responsibilities remained national under Maastricht; there was no harmonized rule set to limit financial-sector heterogeneity.
- The single currency facilitated large cross-border capital flows and rapid financial integration, which, combined with varied national regulation, contributed to fragmentation during the crisis and unhealthy bank-sovereign links.
Progress since the crisis
- Institutional reforms and responses observed:
- Fiscal governance reforms: Fiscal Compact, six-pack, and two-pack.
- Moves toward banking union: Single Supervisory Mechanism (SSM) and steps toward a Single Resolution Mechanism (SRM).
- Unprecedented monetary policy measures (examples cited: LTROs, OMTs) provided time to strengthen EMU architecture.
- Remaining weaknesses:
- Financial market fragmentation persists.
- Key changes to make EMU architecture more robust remain incomplete.
- Recovery remains weak and fragile.
- Identifying private imbalances ex ante remains a significant challenge.
Policy recommendations to minimize risks and manage consequences
- Strengthen market-discipline frameworks:
- Establish clear rules for bail-ins and harmonize insolvency regimes at the national level.
- Implement a Single Resolution Mechanism (SRM) with centralized powers to trigger resolution and decide on burden sharing.
- Create a common backstop (e.g., direct recapitalization of banks by the ESM) to enhance SRM and SSM credibility and to sever bank-sovereign links.
- Bolster supervisory credibility and financial-sector resilience:
- With an effective SRM, enhance credibility of the Single Supervisory Mechanism (SSM).
- Strengthen macroprudential toolkits and pursue structural reforms in the financial sector.
- Improve the Macroeconomic Imbalances Procedure:
- Give greater emphasis to emerging competitiveness gaps and corrective action before they become imbalances.
- Introduce sufficiently strong corrective mechanisms.
- Develop deeper and broader capital markets:
- Diversify funding sources for firms to reduce reliance on banks.
- Remove regulatory, legal, and structural hurdles via concerted euro-area and national policy actions.
- Consider shared fiscal instruments within stronger fiscal governance:
- A shared approach with some elements of centralized fiscal policy would expand countercyclical options when national policies are constrained by market access or fiscal rules.
- Promote growth-enhancing structural reforms:
- Monitor and enforce agreed reforms (Services Directive) and proactively advocate product market reforms in professional services, telecom, and electricity.
- Harmonize labor market regulation, facilitate greater labor mobility, and re-orient worker protection toward unemployment benefits and re-training rather than rigid employment protection.
- These measures aim to raise growth, reduce debt ratios over time, and improve shock resilience.
Strategic outlook
- Europe has progressed toward greater solidarity and integration since the crisis, but further integration and growth-oriented reforms require continued political will.
- Quoting Robert Schuman (1950): Europe is built through concrete achievements that create de facto solidarity; continued concrete steps can provide a more durable foundation for prosperity.
Source: Speech by Reza Moghadam, Director, European Department, IMF, “Maastricht and the Crisis in Europe: Where We’ve Been and What We’ve Learned,” Brussels, Wednesday, February 12, 2014.