This creates two big challenges: first, a common monetary policy for economies that are at different developmental stages – like France and Greece – and at different stages of the business cycle. Second, the moral hazard that arises when governments borrow too much in order to take advantage of lowered interest rates as a result of averaging in the currency union.
We need solutions to both problems. For the first, no simple, realistic solution is available. The economic convergence of the euro area will take time. Far-reaching structural reforms need to be undertaken in countries in order to narrow the gap to the best-performers with respect to competitiveness. The second problem – excessive borrowing by governments – could, in theory be much more easily solved.