EMU as a sustainable currency area

EMU’s governance framework was incomplete at its inception. Its institutional fragilities allowed for the building up of competitiveness and fiscal disequilibria in some Member States during its first ten years and left the Eurozone unprepared to cope with the sovereign debt crisis. While some of those weaknesses have been addressed in response to the crisis EMU’s governance framework remains incomplete to date and therefore vulnerable to adverse market and political-economy pressures. This chapter argues that EMU – or at least the membership of individual countries – will not be sustainable without national adjustment capacity and willingness to implement economic reforms. Those reforms are also a pre-condition for promoting sustainable growth and hence a credible crisis exit strategy. Although EMU’s resilience could still be guaranteed through other mechanisms in the absence of sufficient national adjustment capacity, notably a banking union with an orderly state bankruptcy regime, even if feasible it would mean a rather different model of European integration.