We offer a theoretically based narrative that attempts to account both for the formation of the European Monetary Union (EMU) and for the challenges it has faced. Lack of commitment to policy plays a central role in this narrative and leads to four policy implications for EMU redesign.
- Should the union be dissolved?
No, the union was formed for good reasons, and dissolving it might lead to high and variable inflation.
- Should the union have a bailout fund, and, if so, how large should it be?
Yes, but making this fund large runs the risk of increasing the likelihood of crises in which countries need bailouts.
- Should bank regulations be centralized?
- What constraints on fiscal policy are desirable?
Constraints on the maturity structure of debt are desirable and perhaps enforceable, while constraints on the total amount of debt are clearly not.