Macroeconomic imbalances in Europe: institutional progress and the challenges that remain

The article reviews the key steps in the construction of the Economic and Monetary Union (EMU) and the accompanying debate in the academics and within the European institutions, stressing that most vulnerabilities unveiled by the sovereign debt crisis were known long before the inception of the EMU. But the rules, although later amended, largely neglected the critical implications of macroeconomic imbalances for fiscal and sustainability. As the financial tensions deepened, significant progress has been made in enhancing European economic governance, including the new procedure for macroeconomic imbalance surveillance (EIP). The article argues that preventing and correcting macroeconomic imbalances is now one of the EU's most challenging tasks as major technical and political difficulties still need to be overcome. The EIP represents a major step forward in strengthening the EU's capability for managing the risks to macroeconomic stability, largely contributing to a common understanding among Member States and in the EU institutions of methods and tools for dealing with the fundamental macro drivers. The new procedure comes together with a comprehensive strategy of deep fiscal, financial, economic and political reform of the EMU. Further progress requires the will to change at both the domestic and the EU level in order to effectively implement the new procedures and, where necessary, to reinforce their scopes.