Thus, there is a long intellectual tradition linking rule of law and sound money to functioning of free markets. But this connection found perhaps its clearest expression in the ordoliberal school that developed in Germany in the 1930s. Conceived at the University of Freiburg by Walter Eucken and Franz Boehm, the central understanding of ordoliberalism was that a stable and well-functioning market economy required a strong legal and institutional  1  “Moneta debt esse quasi quaedam lex et quaedam ordinacio firma”. Nicolas Oresme, Traité de la première invention des monnaies (ca. 1355). BIS central bankers’ speeches  1  framework. Pure laissez-faire capitalism was unstable and liable to capture by monopolies. Collectivist central planning, on the other hand, led towards waste and totalitarianism. Thus, as the ordoliberals saw it, the role of government was to frame markets in such a way that actual outcomes would approximate the theoretical outcome in a perfectly competitive market. Achieving such outcomes could imply de-regulation, if government was interfering too much in market processes, or re-regulation, if market failures were apparent – a feature that distinguished it from a laissez-faire approach. In other words, the role of government was both to untie the “invisible hand”, and to keep it firmly cuffed to the rule of law. At the same time, ordoliberalism recognised the crucial importance of monetary and economic stability to a well-functioning market.
Without a solid legal and institutional framework to organise market interactions, however, the country experienced a series of crises, while resources ended up being concentrated in the hands of a few powerful individuals. These experiences led the assumptions of the Washington Consensus to be progressively revised. Even the IMF acknowledged the flaws in the original list of suggestions, in particular regarding the importance of institutions.4 Reviewing the available evidence, the economist Dani Rodrik wrote that the strength of institutions is the most important element of development economics. The mantra of the so-called “revised” Washington Consensus, he wrote, should be to “get the institutions right.”5  2  Vanberg, Viktor J. “The Freiburg School: Walter Eucken and Ordoliberalism.” Walter Eucken Institut, April 2004. 3  The Chicago Boys were a group of young, liberal economists from Chile educated at the University of Chicago. 4  “Report on the Evaluation of the Role of the IMF in Argentina, 1991–2001.” Independent Evaluation Office of the IMF, July 2004. 5  Rodrik, Dani, et al. “Institutions Rule: The Primacy of Institutions over Integration and Geography in Economic Development.” IMF Working Paper Series, November 2002. 2  BIS central bankers’ speeches  2. The principles of effective economic policy  The aim of this brief review is to underscore that all well-functioning market economies are based on a consistent accord of rules, instruments and institutions. And what I would like to turn to now is the state of that accord in the euro area.