Fiscal Politics

Chapter 17. The Making of a Continental Financial System: Lessons for Europe from Early American History

Vitor Gaspar, Sanjeev Gupta, and Carlos Mulas-Granados
Published Date:
April 2017
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Vitor Gaspar


In the autumn of 2009, the global financial crisis mutated in Europe into sovereign debt crises in several countries of the euro area. Financial market participants were desperately seeking access to liquidity and safe assets. Credit risk became a relevant consideration for hitherto considered safe sovereign debt. The prospect breakdown of the euro area was a present threat for investors and populations. The situation started stabilizing only after political commitment to deeper integration was achieved in the European Council of June 2012. That was followed by the announcement of the Outright Monetary Transactions Program by the ECB in September 2012. One year after, in the summer of 2013, euro area fragmentation appeared to no longer be a relevant consideration in the financial calculations of international investors.

The history of financial politics in the early stages of U.S. history can provide insights into what can be done to build a robust and resilient European financial system and to establish the credibility of sovereign debt as safe assets. The U.S. federal government has never defaulted on its debt and the U.S. is a well-integrated monetary union of continental dimension. Alexander Hamilton was the first secretary of the U.S. Treasury, from 1789 to 1795. He managed successfully the transition from a bankrupt federal government to a situation where the U.S. Treasury became the issuer of the ultimate safe asset. In the process, Alexander Hamilton laid the foundations for a modern financial system able to finance innovation and growth.

Alexander Hamilton appears as a rare combination of theoretical and practical reason; strategic and tactical thinking; and of audacity and realism. Building a Continental financial system in the aftermath of sovereign debt crises in the euro area is a priority in Europe. The aim of this article was to find out whether we can learn Hamilton’s recipe for building a continental financial system in Europe.

The comparison of the challenges of Europe today and the early U.S. is the theme of Thomas Sargent Nobel Lecture (Sargent, 2013) that provided the inspiration for this article. Sargent draws on the general lessons from U.S. financial history, focusing on two episodes: the origin of the U.S. fiscal constitution in the late 1780s and the state debt crisis of the 1840s. James (2014) and Kincaid (2014) also interpret a much longer period of U.S. financial history. This article instead concentrates on a very specific period from late 1789 to early 1795 and looks at broader dimensions of finance. By concentrating on a briefer period, it is possible to examine in more detail how it was done. The paper closest to this one in scope is Sylla (2014).

The Hamilton moment illustrates the very strong threefold cord constituted by politics, fiscal policy and financial activities. As emphasized by Sargent (2013) it took a political transformation to make it possible to ground public finances on solid fundamentals. More generally, it is important to realize that changing policy outcomes systematically requires changing the rules and incentives of politics. For Europe a crucial question is: How can we (Europeans) design institutions in Europe so as to align political incentives with macroeconomic stability and financial integration? The experience of the first U.S. Secretary of the Treasury offers some inspiration.

Alexander Hamilton himself poses and answers some fundamental questions:

  • Why is it important to honor public credit? Why not repudiate debt?

  • By what means can public credit be maintained? How to ensure public credit? How to promote a smooth and quick transition?

  • How to restore financial stability in the face of financial panic?

These answers are fundamentally relevant for Europe today. That much was clear from the summary presentation of the euro area crisis in this Introduction. The euro area and its member states are struggling to find timely answers. Those answers matter. They influence growth and employment prospects and the lives of millions of people. But there is one aspect that is crucial to stress. The only answers that can be relevant in the real world are political answers. Public finance and the financial system are part of a system of institutions in the political realm. Those institutions shape the relevant incentives and determine a set of possible outcomes. To repeat: the fundamental question is political: How can the rules of the political game, in Europe, be shaped in order to improve outcomes?

The article has a narrow focus. As already said, it looks at a well-determined episode: the experience of Alexander Hamilton as first secretary of the Treasury, from late 1789 to early 1795. The episode does not exhaust lessons from the U.S. for European financial integration. For example, the importance of politics in shaping the financial system is clear from the coalition between rural debtors, incumbent bankers, and state governments that led to a fragmentation of the U.S. national banking system through a myriad of local monopolies (see Calomiris and Haber, 2014).

The article is organized around the answers to the questions above. The history of the United States, in its early years, illustrates the importance of political institutional building. The replacement of the Articles of Confederation by the American Constitution of 1788 offers a perfect illustration. The history of subsequent decades also shows what institutional designs proved robust and which were not able to withstand political pressure.

The remainder of the article is organized as follows: the first section looks at constitutional politics in the U.S. in the 1780s. The second section presents Alexander Hamilton’s vision of a modern financial system. The third section argues that the initial conditions were, according to standard indicators and analysis, very difficult. The fourth and fifth sections discuss specific actions by Hamilton. We discuss public debt management and crisis management, respectively. In the sixth section we conclude.

Changing the Rules of the Political Game

The challenge of building up U.S. public finances was daunting. The main problem was to ensure the service of debt accumulated during the War of Independence. At the end of 1789, total debt in the U.S. (federal and state) amounted to about $80 million (about 40 percent of GDP). Roughly speaking about one-third was States’ debt and the remainder federal. In his First Report on Public Credit, Alexander Hamilton estimates the contractual interest rates as amounting to $4.6 million. Such amount compares with total operating expenditures of federal government estimates at $0.6 million.

In 1789 the U.S. was, in fact, in default. Bonds were perpetual debts (called consols). Therefore, default corresponded to the accumulation of interest arrears. Principal debt corresponded to bonds called “continental certificates” while accumulated interest arrears were named “indents.” In 1789 these bonds traded at heavy discounts. At the lowest point the market value was about 20 percent for continental certificates and 12.5 percent for indents. To have a term for comparison the minimum market value for Greek 10-year bonds, in mid-2012, was about 15 percent. During the War of Independence, Congress also issued paper currency. Credibility was further undermined by the dramatic depreciation of paper money.

The situation in the 1780s still reflected the experience under the Articles of Confederation. Congress had the authority to incur debts. And, as explained in Federalist 30, the means to service these responsibilities were supposed to be provided by the States. However, the requests from Congress were left unfulfilled. The system in place was not effective. No State met its obligations in full; some did not comply at all or nearly so; and there is even at least one example of explicit refusal to comply (New Jersey). It was also the case that the attempt at reaching agreement for Congress to launch general taxation failed. The specific proposal was to launch a general import duty, whose revenue would be fully devoted to debt service. The proposal to amend the Articles of Confederation for this effect failed (first in 1781, vetoed by Rhode Island in 1782, and, second, in 1783, vetoed by New York). The proponent of these initiatives, Robert Morris, eventually resigned in 1784. Hence, it was clear at the launch of the Pennsylvania Convention that the framework of the Articles of Confederation left the debt accumulated during the War of Independence, for all practical purposes, unfunded. Congress did not have the power to tax. The inability to mobilize adequate revenue, to ensure debt service, translated into the deep discounts reported above.

The problem was political and financial. As much is clearly stated in Federalist 30:

Money is with propriety considered a vital principle of the body politic (. . .) From a deficiency in this particulars, one of two evils must ensue: either the people must be subject to continual plunder (. . .) or the government must sink into fatal atrophy and in a short course of time must perish (. . .)

(. . .) to depend upon a government that must itself depend upon thirteen others for the means of fulfilling its contracts, when once its situation is clearly understood, would require a degree of credulity, not to be often met in the pecuniary transactions of mankind, and little reconcilable with the usual sharp-sightedness of avarice.

The political solution involved having the 1788 Constitution substituting for the Articles of Confederation. The U.S. Constitution:

  • (a) Strengthened the ability of federal government to tax; and confirmed the ability of federal government to use public credit (Article 1, Section 8, Clauses 1 and 2).

  • (b) Gave the central government exclusive competence to regulate external trade and interstate commerce (Article 1, Section 8, Clause 3; “the commerce clause”).

That was appropriate from the viewpoint of public finances as government revenue was—in the late 18th century—dominated by tariffs. To use an expression of Richard Sylla’s, the 1788 Constitution created the “Constitutional Theater” where Alexander Hamilton acted as first U.S. Treasury Secretary. The Constitution made available the tools that would later be used by government (Sargent, 2013). The way this was done is the subject of what follows. Before doing so, next section will characterize Hamilton’s financial program.

Alexander Hamilton’s Financial Program

Sylla (2011) and Sylla, Wright and Cowen (2009) characterize a modern financial system as having six main elements:

  • First, stable and sustainable public finances and competent public debt management;

  • Second, a stable currency;

  • Third, a central bank;

  • Fourth, a banking system;

  • Fifth, securities markets; and

  • Sixth, a process for incorporation of financial and non-financial businesses.

Sylla (2014) refers that these components were in place in the Dutch Republic early in the 17th century and that England introduce them shortly after the Glorious Revolution of 1688. These examples were known in the U.S. Alexander Hamilton referred to them with some frequency.

Sylla (2011) also documents that all of this information is contained in three letters that Hamilton wrote: two in 1780 (Robert Morris and James Duane, 1780a, 1780b) and 1781 (again to Robert Morris). These letters reveal a profound knowledge of financial history and institutions. According to the biography written by Ron Chernow (Chernow, 2004) Hamilton studied numerous authors including William Blackstone, Thomas Hobbes, Hugo Grotius, Samuel Pufendorf, John Locke, Malachy Postlethwaite, David Hume, Richard Price, and Adam Smith. It is clear from those writings that he was as impressed with the successful Dutch and British financial revolutions as he was with the demise of John Law’s schemes in France. The latter experience may have been decisive for the First Treasury Secretary’s acute sense of the importance of trust and stability in finance. From all of this Hamilton concluded that finance was key to state power and economic prosperity. The quote above clearly illustrates the link between public finances and state power. The importance of finance is made clear in the Third Letter:

Most commercial nations have found it necessary to institute banks; and they have proved to be the happiest engines that ever were invented for advancing trade. Venice, Genoa, Hamburg, Holland, and England are examples of their utility. They owe their riches, commerce, and the figure they have made at different periods, in a great degree to this source.

When Alexander Hamilton started his tenure as Secretary of the Treasury none of the six elements, used by Sylla and co-authors to characterize a modern financial system, was in place. As we have seen in the “Changing the Rules of the Political Game” section, the Treasury was bankrupt. When he left the Treasury, all six components were in working order.

Rosseau and Sylla (1999) report estimates of average annual growth in per capita GDP, in the U.S., in the period 1790–1806 that of about 1.5 percent. This result must be put in perspective. First, it is important to recall that growth rates in per capita income before 1800 were about zero. Second, growth in per capita income in the U.S. has been persistently on a positive trend from 1790 onwards. The authors argue for a causal link between finance and growth in early U.S. history. In Rosseau and Sylla (2001), they widen the analysis to a panel of seventeen countries, in the period from 1850 to 1997. They especially examine the examples of the Dutch Republic, England, France, Germany and Japan. The authors suggest the possibility that both growth and globalization may have been “finance led.” That would be in line with Hamilton’s claim about: “banks . . . as the happiest engines ever invented to advance trade.”

A Challenging Beginning: Why Pay for Public Debt?

The Treasury Department was created in September 1789. It immediately got a mandate from Congress to prepare proposals to restore and maintain public credit. The urgency is clear; the First Report on Public Credit was presented in January 1790. One crucial first question was: Why pay for the public debt? Why not default?

The answer can be given at various levels. They are all present in different forms in the first Report.

First, at a very general level, public credit is a cornerstone of public finances and of financial development. Hence, it is vital for political government. It is also key for economic activity, that is, for trade, manufacturing, and farming, and, therefore, for economic prosperity. These points were systemically articulated. The structure of the argument is very close to that followed in recent research by Christoph Trebesch and co-authors (e.g., Trebesch, 2011 and Cruces and Trebesch, 2013).

Second, the debt was accumulated to finance the War of Independence. From the viewpoint of the United States, that was clearly a common good. Today we would label it a pure public (or collective) good. Therefore, the case for honoring the debt was strong on grounds of political (collective) cohesion.

Third, Hamilton was persuaded that the political coalition necessary to foster financial development involved the state and moneyed people. The latter were the main creditors of Congress. The viability of political support required an outcome compatible with the interests of creditors.

In the Introduction we have already documented that the U.S. Constitution provided the federal government with the powers necessary to fund public debt. Congress immediately approved a national tax, along the lines of the proposals that were blocked under the Articles of Confederation. Nevertheless, the starting conditions were dire.

In The First Report on Public Credit, the interests due (annually) under contractual arrangements were estimated at $4.6 million. In 1790, the first complete year of operation of the new Constitution, total tax revenues came in at $1.64 million (Sylla, 2011). Total operating expenses of the government amounted to $0.825 million. So it turned out that tax revenues, while about twice operating expenditures, were only about one-third of interest payments due. We have already reported that when Hamilton took office, the U.S. was in default in its internal and international debt. It was accumulating interest arrears. Sylla (2011) further reports that in March 1790 Alexander Hamilton informed the President that the U.S. Treasury did not have enough funds to honor current expenditures and interest payments on Dutch loans. Authorization for a new $100,000 loan was sought. Within two days, Washington authorized the loan. The federal government was, in 1790, operating hand-to-mouth.

In these conditions, it was very difficult to establish trust and credibility. Nevertheless, from September 1789 when he took office, to March 1790 when the Dutch loan was obtained, the second market quote of Continental certificates and indents recovered substantially. The increase was from about 0.25 to 0.40 for the Continental certificates and from about 0.15 to 0.30 for indents. The secondary market discounts quickly diminished after that. How did he do it?

Hamilton’s Debt Management Strategy

Hamilton’s debt management strategy aimed, first and foremost, at expectations management. It was based on two main elements: a market-based debt service reduction scheme (see Garber 1991) and a Sinking Fund.

U.S. debt was dominated, as was frequently the case in the 18th century, by consolidated perpetual annuities (consols). These bonds paid a percentage of their face value forever. The government, however, had the option to redeem, at any time, the consol at face value. That allowed the government to benefit from falling interest rates. If success in generating expectations of falling interest rates (increasing bond prices) was obtained, he could implement his market-based public debt reduction scheme. The idea is that by paying more than expected on existing debt, he would generate prospective savings that would more than compensate the costs.

Hamilton proposed to pay foreign debt in full. Surprisingly, this was not controversial. However, as Garber reports, even in the case of foreign debt, he did not allow for compound interest to apply to interest rate arrears. According to estimates in Garber (1991), the value saved as of January 1, 1790, represented about 2.3 percent of the total of foreign debt. The payment of external creditors made it possible for the U.S. to tap European bond markets. As described below, European finance played an important role in Hamilton’s market-based strategy, through the use of the Sinking Fund.

For internal debt, the proposals and debated options were much richer (see Sylla, 2011 for a summary presentation and Garber, 1991, for the details). In the end, the Funding Act of August 1790 provided that domestic debt could be converted, under prescribed conditions, into new domestic debt instruments. The new bonds were 6 percent coupon bonds (the 6s), 6 percent coupon bonds with interest payments deferred 10 years (the deferred), and 3 percent coupon bonds (3s). The new bonds paid interest quarterly. The conversion offer treated principal and interest differently. For the principal, the offer was conversion at par into two-thirds 6s and one-third deferred. For interest arrears, the conversion was at par into 3s. There were specific provisions for the conversion of the debts of the States. The details are of no particular relevance for the line pursued in this article.

Garber documents that the market value of the offer was significantly below par. Hence, there was a substantial reduction in net present value of U.S. Treasury liabilities. On the same vein, Sylla shows that interest payments were reduced from about $4.6 million to $3.6 million. This was a substantial reduction.

The operation was very successful. At the end of 1794, when Hamilton was close to departing from the Treasury, 98 percent of domestic debt had been voluntarily converted. However, the take-up was gradual over time. By September 1791 only about $30 million in bonds had been converted. The response in bond market prices was much quicker.

The second important element of the plan was the Sinking Fund. The Fund was entitled to revenue generated by the operation of the Post Office. In the First Report on Public Credit, this revenue is estimated at $100,000. It was further asserted that the sum was likely to considerably grow over time. Hence, the Fund benefited from an important and reliable source of funding. The main ostensive argument for the Sinking Fund was the need to repay (to extinguish) public debt. However, the Sinking Fund could also use loans. That provided the Fund with considerable flexibility.

Therefore, the Sinking Fund was able to play three very important (and related) roles: first, to anchor expectations on a regime where Treasuries were properly funded; second, to accelerate the transition (increase) in bond prices to their new fundamental value (“true standard); and, third, to provide the Treasury with an effective instrument for bond market stabilization in case of disturbances. The latter role was not yet made explicit. It became clear through the actions of the Sinking Fund in stopping the financial panics of 1791 and, more clearly and importantly, 1792.

How Did Hamilton Restore Financial Stability in the Face of Financial Panic?

The success of the plan and the rapid development of financial markets and financial organizations led, in 1792, to a dangerous threat to financial stability. In a letter to William Seton, in early 1792, Hamilton expresses his grave concern with developments observed in securities’ markets: “these extravagant sallies of speculation do injury to the government and to the whole system of public credit.” Given that bond prices peaked in February 1792, a few weeks after the letter was written, the episode testifies how closely and accurately Hamilton observed financial market developments. Already in 1791 there had been a financial disturbance in August-September. The 1791 disturbance was associated with speculation in banks’ stock. In that context, the Sinking Fund was used to stabilize bond markets.

However, it is the panic of 1792 that provides the paradigmatic example. Sylla, Wright and Cowen (2009) argue that these actions anticipate the classical lender of last resort doctrine.

The classical function of lender of last resort was articulated by Thornton (1802) and Bagehot (1873). An excellent presentation is Humphrey (1992). The lender of last resort function aims at protecting the financial system as a whole. It does not aim to save individual organizations. Only illiquid but solvent corporations are eligible for lender of last resort assistance. Insolvent entities should fail. The balance sheet and financial integrity of the liquidity provider are protected by adequate collateral. According to the doctrine, liquidity, through the lender of last resort function, should be available only at penalty rates.

In letters to William Seton, Hamilton defends the provision of very large amounts of liquid funds. Those liquid funds should be made available against the pledging of good collateral. The cost of funding suggested was 7 percent (that was the ceiling fixed in usury laws). Hence the interpretation of Sylla et al. that Hamilton was an early practitioner of the lender of last resort doctrine.

But there is an interesting question. What assets were identified as sound collateral? In the letter quoted in Sylla, Wright and Cowen (2009), Hamilton lists the 6s, the 3s and the deferred as the appropriate assets for the purpose. He suggests that the 6s should be accepted as collateral at par, the 3s should be accepted at 50 percent of nominal value, and the deferred at 60 percent. These values are below but close to the market prices that were to prevail in April 1792 (but clearly below those that had prevailed in early March). Sylla et al. also quote a remarkably clear message to William Seton where he urges the Bank of New York to ponder “how much more can be done in favor of parties who can pledge Public Stock as collateral security. This security of credit you are sure is a good one.” It is hard to think how a case for U.S. Treasuries as safe and liquid assets could be made more emphatically. Perceptions of what are safe and liquid assets act as cornerstones in financial structures. Perceptions and expectations of assets as safe are shaped under financial stress. Hamilton used the 1792 crisis to promote the emergence of U.S. bonds as the ultimate safe and liquidity asset: a safe haven in times of distress.

There is another important point worth repeating. Alexander Hamilton was concerned with the stability of the system. Financial instability threatened the whole edifice that was being built. The economic consequences of financial instability are so far-reaching that they fundamentally influence the effects of financial systems on economic performance. These effects, in turn, have broader political consequences.

Lessons for Building a Continental Financial System in Europe

The first lesson to be drawn is that politics, finance, and fiscal policy are co-determined and co-evolutionary. The process must be conceived and executed in a systemic way. What can be achieved in one dimension is determined simultaneously with the other two.

The U.S. is a monetary union backed by a well-integrated financial system and federal public finances. The euro area is an international monetary union backed by national (political) responsibility for fiscal sustainability. In the sovereign debt crisis in the euro area, financial fragmentation substituted for financial integration. Since mid-2012 the trend of financial disintegration was inverted. Europe is on its way to creating a banking union and a financial union.

The process of European integration has been driven to a very large extent by economic integration. The single market and the single currency are its most emblematic realizations. The European Union provides a pole of attraction and a role model favoring peace, democracy and human rights. Specifically, it shows the possibility of effective application of international law.

The second lesson is that there is a case to give priority to public credit; a case that is based on political, public finance and also on broader economic and financial arguments. The arguments put forward by Hamilton are in line with the implications of recent empirical research by Christoph Trebesch and coauthors. Alexander Hamilton managed to establish public credit while ensuring debt service at favorable terms.

To my mind this lesson is very general. It applies at the national level. It is also a precondition for successful financial integration.

The third lesson is that the fundamental foundation of public credit requires fiscal sustainability. In the U.S., that required the U.S. Constitution to substitute for the Articles of Confederation.

In the euro area after the failure of euro area governance to prevent the crisis, very significant progress was achieved. First, the fiscal governance of the euro area has been strengthened through the adoption of important EU legal acts (the six pack and the two pack). Second, and more importantly, in parallel, member states have also adopted the fiscal compact. Broadly speaking, the rules in the fiscal compact are in line with the six pack.1 The important difference is that the fiscal compact aims at internalizing the European constraints into national governance frameworks. This aspect is decisive. In Europe, politics are dominated by the fundamental principle of the dominance of the national dimension of politics. Hence, European rules can only be fully effective once subsumed in the national frameworks.

The European rules prescribe a fiscal position close to balance or in surplus over the medium term. The effective operation of such rule ensures a slowly declining public debt-to-GDP ratio (assuming positive nominal growth of GDP over the medium term). Fiscal sustainability is guaranteed by compliance with European rules. Nevertheless, it is sobering to recall that government default in the early years of the U.S. had, at its root, political behavior not in line with the letter of the Articles of Confederation. At the end of the day, the responsibility has to be national: in accordance with the principle of the primacy of the national dimension of politics.

Clearly it is possible to deny the primacy of the national dimension of politics and to advocate centralization. However, it seems to me that centralization is neither politically desirable nor politically feasible.

The fourth lesson is that smooth and quick transition requires active and skillful management. This is particularly so given the importance of perceptions and expectations. The transition must be so managed that perverse equilibrium paths are avoided.

In Europe, financial support has been made available in diverse forms. The European Central Bank (ECB) has signaled that “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro” and Mario Draghi, the President of the ECB added, “and believe me it will be enough.” The ECB announcement came in July 2012. One month after, heads of state or government reached a political agreement on deeper economic and monetary union. Since August 2012 quick progress has been achieved. In the autumn of 2013, the catastrophic risk associated with euro area fragmentation was no longer a salient concern for global investors. Nevertheless, a transition is never complete before the new framework is capable to prevent accidents and to minimize their effects in case they occur.

That leads to the fifth lesson: given that it is always possible that accidents will happen, public finance and the financial system must be robust and resilient. The institutional framework underpinning budgetary discipline and financial stability must be designed so as to be able to stem episodes of financial panic and to exclude perverse self-fulfilling equilibria. Alexander Hamilton proved more than equal to the task during the financial panic of 1792.

In 2009–2010, the euro area was not prepared for sovereign debt crises. The euro area was unable to prevent financial fragmentation and negative sovereign-bank credit risk feedback loops. Much progress has been made. But the job is not yet done. The priority is the realization of the banking union complemented by the integration and development of financial markets. The credibility of the banking union requires the existence of financial backstops of sufficient capacity to break the vicious sovereign-bank links and, hence, to ensure robust and resilient financial integration.

It is also important to bear in mind that financial transitions are dangerous moments. Liberalization and opening of financial systems is often associated with exuberance and excess. The local connection between politics and finance adds up to complexity. Financial crises, especially when associated with balance sheet vulnerability, have very long-lasting consequences, spanning generations. Therefore, the ability to maintain financial stability is key for the long-run consequences of financial architectures. Transition risks have also to be pondered. This is particularly important when building continental financial systems.

In the end, it is clear there is no recipe for baking a continental financial system. Institution building requires deep understanding of the specifics of the particular case.

To conclude: For Europeans, the most inspiring message may well be:

Whoever considers the nature of our government with discernment will see that though obstacles and delays will frequently stand in the way of the adoption of good measures, yet when once adopted, they are likely to be stable and permanent. It will be far more difficult to undo than to do. Gazette of the United States, September 1, 1790.

Paraphrasing Thomas Sargent: That may well have been true of the U.S. then and it is certainly true for Europe now.


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This chapter is reprinted from the Journal of European Integration, Vol. 37, Vitor Gaspar, “The Making of a Continental Financial System: Lessons for Europe from Early American History,” ©2015, with permission from Taylor & Francis.

The views expressed in this article are the sole responsibility of the author and should not be attributed to the International Monetary Fund, its Executive Board, or its management. The article benefited from comments, corrections and suggestions from Guillermo Calvo, Zsolt Darvas, Roger Gordon, Stephanie Hare, Heinz Hermann, Russell Kincaid, Sixten Korkman, Harold James, Johannes Lindner, Silvia Luz, Hans-Helmut Kotz, Maria Eugènia Mata, Laura Jaramillo Mayor, Yves Mersch, Ricardo Reis, Andre Sapir, Richard Sylla, Francisco Torres, Shahin Valèe, Max Watson, Thomas Wieser, Guntram Wolff and Michael Woodford and participants in seminars at Bruegel, Brussels, at St. Anthony’s College, Oxford, at the ECB, Frankfurt, at CFS, Frankfurt, at Columbia University, New York, and at a Conference at Eltville organized by the Bundesbank, the Bank of Japan, the Institute for Monetary and Financial Stability and the University of Hamburg.

The fiscal governance framework in the euro area has also become more complex, which gives rise to a number of other challenges (see Eyraud and Wu, 2014).

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