European integration and financial crisis: causes, implications and policy directions

The financial crises which unfolded in the course of 2008 had a coincident impact on all countries, with an unprecedented contraction on real economies, In Europe, the crisis underlined two main issues: first, 10 years after the inception of the Euro, structural divergences persist across countries; second, European economic policy integration is mostly confined to monetary and competition policy. The crisis revealed how one-size-fits-all monetary policies could "nurture" structural divergence and lack of competitiveness, and provides no incentive for structural adjustment. Policy action to resolve the crisis was framed by the Euro area complex policy design. Common monetary policy acted swiftly and flexibly; competition policy served to design guidelines on supporting financial sector so that such support could be implemented while maintaining a level playing field across the Euro area. However, there was no more fiscal coordination at the Euro than the global level, rather some beggar-thy-neighbour policies in some cases, and little regulatory coordination. Overall, several policy challenges were highlighted by the crisis: a common monetary policy requires better fiscal coordination and more stringent constraints on national budgetary policies; regulatory policies and supervisory practices should be designed to prevent a loosening of lending standards and abnormally fast growth in credit during housing booms.