The euro is fragile; that’s OK

Summary:

The Economic and Monetary Union (EMU) was adopted through compromises between governments with widely different views. Many things have gone wrong, but the euro has survived despite its imperfect construction, and it will probably survive in the future as well. The reasons are that it provides a stable exchange rate among its members and leaving the euro would be so disruptive that no government would even contemplate the idea.

What the EMU needs is (i) decentralized fiscal discipline based on sound economic principles and legal obligations, (ii) a central bank that acts as a lender of last resort to governments, and (iii) complete banking union, which makes it possible for the central bank to act as the lender of last resort to financial institutions. The first and second requirements are essential for the survival of the euro. The third is desirable and includes a bank resolution authority and a macro-prudential authority. Further integrating capital markets in the union and introducing eurobonds would further help the monetary union become even more efficient.

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