Macroeconomic Adjustment and Institutional Reforms in the Euro Area

The introduction of the Euro in 1999 implied the transfer of the responsibility for monetary policy to the European Central Bank and it eliminated the member countries’ nominal exchange rates. The smooth operation of a common currency area requires that independent exchange rates are replaced by other adjustment mechanisms. In the Euro area, wages have not been flexible enough, labor mobility is low, no sufficient central fiscal institutions exist, and the fiscal rules have been weak. This led to large external imbalances and high public debt in some countries. Since the outbreak of the economic crisis, macroeconomic reforms resulted in improved international competitiveness and lower public deficits. Several new institutions have been created on the European level, strengthening mutual economic surveillance and cooperation.