How to fix crisis management in the Eurozone

This column takes stock of what we have learned from the Eurozone crisis and the policy responses. It discusses how Europe can put in place policies to reduce the chances of such a crisis repeating itself. By strengthening the Eurozone’s ability to withstand speculative attacks, it argues that policymakers would make them much less likely. After “market hurricane ” season hit financial markets this summer, it's time to take stock of Eurozone crisis management. Two things stand out: On all fronts Eurozone governments are moving in the right direction, albeit too often falling “behind the curve” in the timing, size, and scope of their measures (Wyplosz 2011); There is a broad consensus of expert opinion on what still needs to be done to stabilise financial markets durably and put the Eurozone crisis to rest once and for all. Removing the underlying causes of financial instability The sovereign debt crisis of the Eurozone has had very real economic root causes. With their March 2011 conclusions, the European Council decided on a radical overhaul of economic governance and new economic policy orientations for the Eurozone that are in principle capable not only of enforcing budgetary discipline but also gradually removing the underlying economic rigidities and divergent wages and costs. While it is true that the Council’s record in enforcing its polices with member states is not good, discipline from financial markets can be expected to play a strong role in keeping countries on track. Moreover, in their recent letter to van Rompuy, Merkel and Sarkozy advocate useful measures to strengthen nationa