The Maastricht Treaty, which was signed in 1992, made monetary policy a euro area competence but left economic and fiscal policies under the responsibility of national governments. The concept of economic union relied essentially on the single market, with few binding constraints on economic and fiscal policies. Over time, this turned out to be a significant institutional shortcoming. Moreover, the transfer of a core sovereign prerogative like monetary policy to the supranational level is a highly political act which entails important political commitments for the future. In particular, the participating countries must undertake to conduct fiscal and economic policies in a way that allows monetary union to work properly. This is a responsibility that the euro area countries share, a responsibility that governments have to fulfil vis-à-vis their peers and vis-à-vis their own citizens. Seen from this perspective, it is clear that the concept of EMU goes beyond economic and monetary integration. Let me add that the single market itself has a political dimension as the proper functioning of markets requires strong institutional underpinnings, such as enforcement of contracts, consumer protection and competition policy. It has mandated the creation of a federal executive (the European Commission), legislative (the European  1  In the late 1970s, European countries agreed on closer exchange rate cooperation by setting standard fluctuation bands of plus/minus 2.25% for their bilateral exchange rates.
When the bubbles burst after the global financial crisis of 2007, governments stepped in to support growth and some of them were called to rescue ailing banks. In this way, private indebtedness turned into public indebtedness, with disastrous fiscal consequences even for countries that had run fiscal surpluses prior to the crisis, such as Ireland and Spain, and even more for those that had not, such as Greece. A further shortcoming of the Maastricht framework was the inability to deal with what is now being called the “bank-sovereign nexus”. When systemically important banks run into trouble, governments are expected to step in and provide fiscal support to contain the spillovers. Beyond that, banks are typically the largest holders of government debt from their respective sovereigns. These ties, or nexus, between banks and their governments can lead to a dangerous downward spiral Another effect of this downward spiral, under way since the euro area crisis erupted in 2010, is the fragmentation of capital markets. The bank-sovereign nexus has led to a situation whereby cross-border lending of banks has gone down significantly, as banks retreat more and more to their domestic markets, encouraged by their shareholders and, sometimes, by  BIS central bankers’ speeches  3  national banking supervisors. The crisis is undermining a key achievement of the euro, the integration of capital markets. A fundamental problem of the Maastricht Treaty was its over-reliance on the assumption that market discipline and peer pressure would provide sufficient incentives for national policy-makers to conduct sound fiscal and economic policies.