As regards monetary policy, the Eurosystem has implemented a set of measures that ensure the provision of liquidity to the euro area financial system, including to the banks of those peripheral countries that are currently subject to the greatest market scrutiny. With respect to fiscal and macroeconomic imbalances, euro area governments are now strengthening the rules for fiscal and broader economic policy coordination. They have created and are refining facilities that can provide external financial support to those Member States facing the most intense pressures in sovereign debt markets. These developments aim to correct the deficiencies in the institutional architecture of Economic and Monetary Union exposed by the financial crisis. These facilities need to have sufficient resources as well as the flexibility to contain market pressures and coordinate the public and private sectors so as to achieve a sustainable and mutually beneficial outcome in an environment where several equilibria may be possible. The Asian experience in the mid- to late-1990s demonstrates that radical reform can lead to a sustained recovery – one achieved largely without restructuring public debts. Indeed, one can argue that Asia has emerged from its financial crisis stronger than before: the institutional weaknesses which contributed to the build-up of financial fragilities, but were masked by high growth rates during the pre-crisis boom have been addressed. Similarly, Europe will emerge from its current travails stronger if the weaknesses revealed by the recent financial crisis are properly identified and corrected through institutional innovation and reform. I am confident that this will be the case.

A further important similarity between the emerging market experience and that of the peripheral euro area countries is that the external debt is denominated in a currency which the national authorities do not completely control. In emerging markets, so-called “original sin” – that is, a lack of credibility created by poor macroeconomic discipline in the past – implied that external debt was overwhelmingly denominated in US dollars. 8 In the euro area, debt is denominated in euros. Although this is obviously the currency of euro area countries, the single monetary policy aims at price stability across the euro area and thus cannot take account of national priorities deriving from fiscal or financial weaknesses in peripheral countries. By implication, neither in the emerging markets nor in the euro area periphery can the real value of the external debt burden be eroded by inflation or devaluation. Any attempt to devalue would simply raise the domestic burden of the external debt. Of course, this was precisely the point: by issuing debt in a currency which they could not control, the national authorities in the euro area “tied their own hands”. Before the crisis, they obtained a credibility gain that would lower overall funding costs and thus reduced the probability of a crisis. But when a crisis occurs, the external value of the debt burden cannot be reduced by devaluation. Differences between euro area and EME experiences While many of the experiences of the euro area periphery and the EMEs are similar, there are also important differences.