On the future of the EMU: Is more fiscal integration indispensable?

Abstract

It is often maintained that the euro debt crisis showed that the Economic and Monetary Union (EMU) was not sustainable without more fiscal integration. However, important causes of the crisis were extraordinary and are highly unlikely to occur again. While the legacy problems of the crisis have been grave, they can be deemed temporary. Therefore, these problems should be combated pragmatically, but with temporary instruments only. A systematic analysis shows that the root causes have been tackled with a wide variety of reforms, both to the EMU itself and by way of structural reforms of the member states. In particular, evidence is presented that the adjustment capacities of the EMU countries are better than commonly recognised. Additional reforms are suggested, especially in the financial sector. With these reforms in place, future crises would have less serious effects. A reformed EMU should be able to withstand such crises without further fiscal integration.