We need solutions to both problems. For the first, no simple, realistic solution is available. The economic convergence of the euro area will take time. Far-reaching structural reforms need to be undertaken in countries in order to narrow the gap to the best-performers with respect to competitiveness. The second problem – excessive borrowing by governments – could, in theory be much more easily solved.
However, the necessary political reforms have made little progress so far. Formally, the EU has a set of fiscal rules that restrict public lending – the Stability and Growth Pact. Yet these were regularly violated before the financial crisis, without any meaningful consequences. In response, the EU reformed it, but the discretionary scope was actually expanded even further.