Policy coordination, conflicting national interests and the European debt crisis

This paper tries to identify the causes of and solutions to the debt crisis, by moving from the content of a previous debate on policy coordination in the euro area and from the available evidence on the existence of conflicting national interests within the governing bodies of the European Central Bank (ECB). It argues that before 2007 the flaws in the institutional organisation of the process of coordination between monetary and fiscal policy affected the cyclical and growth operation of the economies. After then, they have contributed to intensifying the conflicts among national and European authorities. The conflicts have curbed policy reactions, held back the interventions of the ECB, as occurred to the Federal Reserve during the crisis of 1929, and favoured the speculative attacks. The conclusion is that the organisation of the area must be reformed to allow its institutions to effectively pursue the objectives for which they were created, i.e. to protect the citizens from the instability of the international financial markets. As has been done in monetary policy, the reforms must reduce the uncertainty on the actual conduct of national policies and transform the defensive attitudes of the different actors of the process into a positive search for the most effective policy for the whole area.