In the absence of a central political authority, such rules and institutions are essential to overcome collective action problems and prevent free riding – to maximise the common good as opposed to private utility. The key to effective rules and institutions is as follows: their scope must be commensurate with the scope and degree of economic and financial integration in the euro area.
Otherwise, authority lags behind integration and crises cannot be efficiently forestalled. In general, policymakers have recognised that fundamental changes to economic governance are needed after the crisis. But my main contention today is that the reforms put forward in response, whilst very important, do not yet meet sufficiently the criterion for effectiveness.