This not only created the conditions for a pronounced boom-bust cycle and a severe balance sheet recession in the worst affected economies. It is also, crucially, masked the postponement of necessary reforms in the structural area. According to the World Bank’s governance indicators, the gap between the best and worst performers in terms of perceptions of institutional quality actually diverged in this period.
3 Relative price flexibility also hardly improved. Though monetary union resulted in inflation differentials in the euro area falling to a level comparable to the US, their persistence remained much greater: the euro area experienced a divergence in relative prices twice as large as the one observed in the US.