And this in turn has implications for governance of structural reforms. Whereas fiscal policies are coordinated through strong rules, coordination on structural policies so far has been comparatively loose. We have more or less counted on the benevolence of policymakers to internalise the interest of the other participating countries.
But insofar as reforms and inflation have become intertwined, these arrangements are no longer consistent with a monetary union based on price stability – if indeed they ever were. Thus, euro area policy makers have a duty to coordinate structural and fiscal policies more closely. And in fact, they have a legal obligation to do so enshrined in the EU Treaty.