The Graduate Institute, Geneva and CEPR, Geneva, Switzerland
1 Paper presented at the 30th Panel of Economic Policy , Luxembourg, October 19, 2015. I am grateful for comments and suggestions offered by Thorsten Beck, Marcel Fratzscher, Ethan Ilzetzki and several Panel members.
The Managing Editor in charge of this paper was Thorsten Beck.
When it was created, it was reasonable to think that the architecture of the monetary union was not perfect. It was also likely that the imperfections would lead to difficulties, possibly even crises. This article identifies six flaws, most of which had been identified even before the launch of the euro. It starts by pinpointing why the Eurozone, a bold and unprecedented experiment, is inherently fragile. It is not conducive to the convergence of national inflation rates, it is not an optimum currency area, and it is not a federal state. Taking these characteristics as given, the article argues that the Eurozone needs to address their implications. It observes that it has not been the case so far, hence the six flaws: fiscal discipline has not been achieved; the need for a Banking Union, which has finally been recognized and only partly implemented; the ECB is not a complete and fully independent central bank; some member countries need a sovereign debt relief; structural reforms are badly needed but intrusiveness cannot be the solution; the governance of the Eurozone is not designed for crisis management.