G. Russell Kincaid, Max Watson
Early critics of the euro’s design pointed to the disruptive potential — both political and economic — of country-specific shocks in a monetary union that is a far cry from an optimal currency area. The euro crisis has confirmed the risks associated with a ‘one-size-fits-all’ monetary policy, decentralized financial supervision, and inadequate fiscal backstops. This article examines how the active use of national fiscal policies and macroprudential policies can mitigate these risks. Cross-border coordination of macroprudential policies is essential to ensure their effectiveness. In addition, area-wide reforms are necessary including a more complete banking union with a well-funded common backstop.