³Ô¹ÏºÚÁÏÍø

With the Fiscal Compact and other institutional innovations, Europe is attempting to remedy some of the weaknesses revealed by the crisis in the governance of the euro area. Important as it is, one cannot be sure that the new institutional set-up will guarantee the avoidance of the macroeconomic mistakes that fed the crisis. It is therefore useful to see whether there are prospective behavioural changes that could complement the institutional innovations.

One interpretation of one factor behind the problems revealed by the crisis in Southern European countries is that, after decades with high and variables rates of inflation, economic agents had difficulty in adapting to the low and stable inflation achieved by the ECB. While in places like Germany this was more a continuation of the pre-euro experience, even if the record of price stability achieved with the euro was even better than that achieved with the Deutsche-Mark, in southern European countries this was a genuine regime change and behaviour did not swiftly adjust to it. This could help explain three developments. First, nominal wages well exceeding productivity gains were asked and granted, with the still lingering expectation that future inflation, possibly generated by devaluation, would then bring real wages down. This led to a cumulative loss of competitiveness and therefore to trade and current account deficits. At the same time perceived real rates of interest were too low, as the expected inflation component of nominal interest rates was too high, and this stimulated investment, particularly in real estate, also because houses were considered a protection towards anticipated inflation. As far as public finance is concerned, governments may have been affected by the same inertia as households, firms and banks and may have thought that they could indulge into larger deficits because inflation would, as in the past, eat into the real value of government debt, thus limiting the growth of the debt to income ratio. With this hypothesis one could help explain five weaknesses of what are now stressed economies: first, a loss of competitiveness, second, large trade and current account deficits, third, excessive investment in real estate bringing with it, over time, as fourth characteristic, bad loans for banks and therefore bank losses and, finally, excessive deficits and debt.

The rest of the story has a much more positive tone. This is that the crisis should have made it clear in the most forceful way that wage, investment, lending and fiscal behaviour were not consistent, in stressed countries, with the price stability brought about by the ECB and that, therefore, large vulnerabilities accumulated, which resulted, when the crisis struck, in great economic and social costs. Behaviour has to change going forward to avoid permanent damages to the economies involved and this gives the hope that the lesson has been learned and that the same mistakes will not be made again.

While it is too early to be confident that the lesson has been learnt and that the positive effect of past mistakes are now indeed apparent, a favourable omen in this respect is that, in stressed jurisdictions, albeit with difficulties and even acute ones in Greece, the policy lines that common wisdom had deemed necessary are actually being implemented