A New Model for Balanced Growth and Convergence
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A New Model for Balanced Growth and Convergence

Achieving Economic Sustainability in CESEE Countries

Edited by Ewald Nowotny, Peter Mooslechner and Doris Ritzberger-Grünwald

This topical book addresses the need for emerging economies in Central, Eastern and South-Eastern Europe to find a new, sustainable growth model that fosters continued convergence with the EU without leading to the build-up of new vulnerabilities.
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Chapter 4: The European debt crisis and a stable design of EMU

Klaas Knot and Silvie Verkaart


The European debt crisis confronts us with a number of questions. What went wrong? Why were we so late in spotting what went wrong? What can be done about it? The central thesis of this contribution is that the rules governing the economic and monetary union (EMU) focused too much on fiscal positions and excessive deficits. However, fiscal profligacy was not the root cause of the crisis, but mainly a manifest of much deeper-rooted macroeconomic and financial imbalances, such as asset price bubbles and loss of competitiveness. In the future design of EMU, these underlying causes will have to be addressed. Before the start of EMU, several economists doubted whether rules for national governments were necessary at all (for an overview of the discussion, see Eichengreen and Wyplosz, 1998). Some of them were convinced that financial markets would enforce policy discipline. Markets were expected to restrain profligate governments by charging them higher interest rates and, thus, forcing them to change their ways.

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