## "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

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### 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.*

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## References

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- [Ireland and the IMF](http://www.imf.org/external/country/IRL/index.htm)
- [Italy and the IMF](http://www.imf.org/external/country/ITA/index.htm)
- [Spain and the IMF](http://www.imf.org/external/country/ESP/index.htm)
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_Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/sp021214_