The EMU Debt Crisis: Early Lessons and Reforms

The economic and financial crisis and its aftermath have put economic and monetary union (EMU) to the test and exposed gaps in its initial policy architecture. Collective rules of fiscal discipline have proven difficult fully to enforce and excessive public indebtedness has been confirmed as a potential source of systemic instability. Broader economic and financial imbalances have also been shown to carry important risks for individual Member States' and area-wide stability. Recent governance reforms have sought to address these shortcomings. In particular, the so-called Six-Pack has brought changes strengthening the ability to prevent and correct economic and fiscal imbalances in the future. With the crisis not terminated, however, the debate over optimal policy arrangements continues and additional governance reforms have been put forward. This article reviews some lessons drawn from the crisis episode for the economic and budgetary framework of EMU and describes the governance reforms that have been undertaken as part of the comprehensive solution needed to underpin the single currency.