Aligning Crisis Management and Long-Term Reform Incentives

Abstract

The paragraphs above sketched out a normative and positive long-term target picture for the European Monetary Union. It assumes that the individual countries have incentives to continue with national reforms and consolidation measures. And it assumes that investors will regain some confidence in the economic perspective of the eurozone. These assumptions hinge crucially on how the crisis management is conducted and how long-term investment conditions are set. Many political reservations concerning monetary unification reflect the concern that the big bailouts—be it through the rescue funds, the ECB or newly created transfer mechanisms—may erode the incentives for national governments to see through painful reforms and rather to rely on the assistance of the community. The following paragraphs try to draw some lessons on crisis management and how to deal with the mutualisation of government debt.