Binding fiscal rules and an institution that observes their adherence are just one component of a consistent reform agenda. Additionally, it is important for capital markets to resume their role of disciplining national fiscal policy. As for enterprises, more deeply indebted countries ought to pay higher interest rates. This will only happen if the no bail-out clause in the Maastricht Treaty really has teeth.
Therefore, it must be possible to restructure public debt without posing major risks to the financial system. The July edition of the Bundesbank’s Monthly Report describes what needs to be done to make this possible. There are two reforms I’d like to mention in the following. First, we need to sever the sovereign-bank nexus.