So we have got rid of the politically unpleasant adjustment mechanism and have very little instead. Yes, the enlightened founding fathers (such as Otmar Issing) knew many of these things in advance and tried to minimize the free-riding by setting certain safeguards against it. Despite that, I believe many must be bitterly disappointed or shocked that many of these good rules proved to be so time-inconsistent, or dynamically inconsistent. Yes, many good rules have already been breached or are close to being breached (some of the Golden Rules of European law, one should add): •  the no bail-out clause  •  flirting with monetary financing of sovereign debts  •  consideration of something like potentially permanent public support for financial institutions operating on the single market  I believe that these rules are especially dear to this audience. So one has to ask: What are the prospects of the project when to keep it going you need first to breach some fundamental rules that should have created a solid and long-lasting basis for it? It is by definition hard to enforce rules among sovereigns, even when those rules are more important than fiscal or monetary ones – look at the United Nations, for instance.
But the opposite and rather bitter argument can also be made. The ECB at times has to stand against all 17 governments of the eurozone member states. I do not want to talk about nominal and real convergence, about rigidities, OCA arguments etc. Rather, let’s take one example. Many complain that it is so hard to make real macroeconomic adjustments within the current eurozone, among its individual states. But if I understand monetary history correctly, the eurozone was created partly to make standard adjustments more complicated. The fear of constant “humiliating devaluations” was one of the reasons why some countries wanted so much to have a single currency with Germany and wanted a transfusion of credibility for their own economies. So the desire to free ride on the credibility of the former hegemon was a part of the very basic idea of some, monetary weaker, countries. We are so happy to have got rid of humiliating devaluations, but we have not offered any better adjustment mechanism instead. When market forces appear on a different front – say, the bond market – many in the EU want to destroy or bypass these forces again and not to adjust the economies that have imbalances. The funny thing is that many are happy that the supposed tragedy of devaluations is over, but what we are now requiring of the southern axis of the eurozone is a competitive devaluation. But in a harder-to-achieve form: a so-called internal devaluation.