Reengineering EMU for an Uncertain World

Policy Brief
February 2013

The euro area crisis has probably passed the acute phase, but it has entered a chronic and unstable phase of fractured credit markets, too high funding costs, very weak growth, and dim expectations. More austerity and reforms at the national level alone will not be enough to stabilize the euro area. To ensure its sustainability, the euro area needs to be reengineered to restore political solidarity, end the debate on default and exit, strengthen its institutions and launch eurobonds, and refocus cyclical policies towards stabilizing the business cycle. Without these steps, the euro will never be a credible and sustainable monetary union.