Should countries be subject to an excessive deficit procedure (EDP) or be involved in a financial assistance program by the European Stabilisation Mechanism (on which I will touch on shortly), they will also be subject to an enhanced monitoring by the European Commission. Overall, the cumulative effect of these reforms will be a significant enhancement of fiscal governance in the euro area and it is important that the reforms are now implemented fully. Macroeconomic Imbalances Procedure. Another important innovation of the “six pack” Regulations is the introduction of the Macroeconomic Imbalances Procedure (MIP), which is designed to prevent and correct phenomena such as high current account deficits, unsustainable external indebtedness, abrupt or prolonged loss of competitiveness and housing and credit booms and busts. Unlike reforms in fiscal governance, which were mainly aimed at strengthening what was already in place, the Macroeconomic Imbalances Procedure is something which was completely absent in the initial design of the founding fathers of EMU. The procedure starts from a scoreboard of indicators, whereby the European Commission identifies the countries and issues which require in-depth reviews. Based on these in-depth reviews and depending on the severity of the imbalances the Commission proposes a policy recommendation under either the “preventive arm” or the “corrective arm” of the MIP. In particular, if the Commission identifies an excessive imbalance that may jeopardise the proper functioning of EMU, it will propose a follow-up under the corrective arm of the MIP, the Excessive Imbalance Procedure.
How the crisis revealed institutional weaknesses in the euro area  As I already noted, the monetary policy response to the crisis has been mainly aimed to buy time for reforms that become effective with some time lag, but it cannot substitute for reforms as time goes by. In this respect, the crisis has unveiled the incompleteness of the euro area’s institutional design which currently policy makers are addressing both at the national level and at the euro area/EU level. Let me first outline these main weaknesses and then go through the progress that has been made so far and the road ahead. The euro area was missing an effective framework for (i) crisis prevention (ii) and crisis management and resolution, which are, as I will argue, essential ingredients for effective policy-making in a monetary union. Let me elaborate. The lack of effective crisis prevention framework before the crisis was indeed evident. First, too complacent regulatory policies in the financial sector still allowed excessive risk to build up. The establishment of the monetary union made is easier for deficit countries to finance macroeconomic imbalances through cross-border capital inflows for too long, resulting in the accumulation of risk. When these flows turned into outflows as the economic environment deteriorated after 2008, these imbalances not only led to problems for the countries concerned but also produced contagion to other parts of the euro area.