The euro area economy is held back not only by current geopolitical tensions, but also by frictions in labor and product markets. Structural reforms in these areas are of utmost importance to increase the flexibility of the economy, thereby improving its resilience against detrimental shocks and raising the euro area’s noninflationary growth potential. Policymakers are well aware of this assessment.
Of course there is an excess of risk aversion and fluctuations, and that may cause great difficulties for monetary policy. But in the long run, the different perception of risks makes the system more stable. And what’s more, it forces governments to keep their finances under control. Before the introduction of the euro, corrective signals came from exchange rates.