ed? It is striking that in spite of a growing body of literature draw-ing attention to the non-fiscal aspects of the development of thecrisis, other problems that emerged during the euro crisis havealmost disappeared from the policy discussion at top level
. Creditbooms and the perverse effects of negative real interest rates incountries where credit to the non-traded sector gave rise to a sus-tained rise in inflation were the focus of policy discussions in theaftermath of the global crisis, but these issues are barely discussedat head-of-state level. Real exchange rate misalignments withinthe euro area, and current-account imbalances, are largely consid-ered to be either of lesser importance, or only symptoms of theunderlying fiscal imbalances. Finally, the role of capital flowsfrom northern to southern Europe and their sudden reversal, aremerely discussed by academics and central bankers, although thesudden reversal of north-south capital flows inside the euro area isfragmenting the single market and creating major imbalanceswithin the Eurosystem of central banks
.To address the issue I start in Section 2 by briefly reviewing evi-dence on the link between fiscal performance and market tensions.I then turn to presenting in Section 3 why the crisis has revealed amore fundamental weakness in the principles underpinning theeuro area. In Section 4, I discuss options for the way out. Policyconclusions are presented in Section 5.
It is undoubtedly true that the euro area in its first ten years suf-fered from a lack of fiscal discipline, that from the standpoint of sustainability of public finances good times were wasted, andthat the credibility of fiscal rules was compromised (Schuknecht
Interestingly, the European Commission report on the first ten years of EMU (EuropeanCommission, 2008) emphasised the errors resulting from the neglect of non-fiscal dimensionssuch as competitiveness, credit booms and current-account deficits. For this reason the six-pack legislation introduced a new procedure called the
Excessive Imbalances Procedure
to addressexternal imbalances. However, subsequent policy discussions have largely refocused on fiscalissues.
Recent contributions to the literature on the non-fiscal roots of the euro crisis include De Grauwe(2011), Gros (2011), Lane and Pels (2011), and Sinn and Wollmershaeuser (2011). See alsoMerler and Pisani-Ferry (2012).
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