. permeating the bretton woods conference was a vital sense of co - operation, identified as the " spirit of internationalism " by raghuram rajan, the current director of the imf's research department in a recent lecture. 2 the bretton woods delegates were able to see how their own country's interest was clearly wrapped up in a collective interest. all represented nations understood that their own countries might sometimes need to shun politically expedient policies and, instead, " play by the rules of the game, " thus promoting the common good of a well - functioning international monetary and financial order. delegates also saw that the fund could act as an impartial arbiter or umpire to call out countries that violated the rules by pursuing policies that impeded the free flow of goods and services. the prime focus of delegates was to encourage trade flows, rather than to rebuild or develop international capital markets. this is understandable when you recall that as a legacy of world war ii, governments controlled international capital flows tightly, and private capital flows were a tiny fraction of what they are today. capital controls were symptomatic of the enormous faith that delegates had in the power of the state to direct economic activity and to control economic variables, including the correct exchange rate values among the world's major currencies. the controls were also symptomatic of the fact that outside the united states, capital markets had either atrophied because of the war, or simply were not yet well developed. because of the stresses brought on by the war, the allocation of capital was much more state directed than market directed. these controls stayed in place for some years after the war, persisting longer in europe than they did in the united states or canada. the bretton woods system of fixed exchange rates did not work all that smoothly, and its framework led to several crises along the way. during the quarter century that the system operated, canada developed a reputation as the " bad boy " of the international financial system when we " temporarily " opted out of bretton woods in 1950. by that time, strong capital inflows into our resource sector, as well as sharply higher commodity prices, led to upward pressure on the canadian dollar. in addition, there were speculative short - term capital inflows, which added to the pressure on the currency. to maintain the fixed exchange rate, canadian authorities first intervened on a massive scale. foreign exchange reserves rose by 40 per cent

the real economy were likely. 2. the incentive structure might become flawed. moral hazard could be aggravated with regard to the borrower. if a member country knows that it does not have to fully service its contractual liabilities obligations but instead restructure its debt, it may be tempted to accumulate excess levels of debt. 3 3. the credibility of the monetary union as a whole could be scratched. if investors paint the solvent member states with the same brush, risk premia on sovereign bonds would rise sharply affecting the whole specter of credit. 4. last but not least, there are legal considerations. generally, if a government does not service its financial obligations it breaches its legal obligations ( independent of the effective lack of enforceability by the creditors already mentioned ). in the case of the euro area there is an additional trait. article 126 paragraph 1 of the treaty ( which is binding for all eu countries not only those whose currency is the euro ) clearly see bini smaghi ( 2011 ) ; reinhard et al. ( 2003 ) ; ozler ( 1993 ). see ecb monthly bulletin ( 10 : 2011 ). bis central bankers ’ speeches states that a member state “ shall avoid excessive government deficits ”. although there is some scope for interpretation what “ excessive ” means it can hardly be doubted that a deficit that leads to a sovereign default was ultimately excessive. 4 working for the better : closing the implementation gap … these sound arguments call for the avoidance of a sovereign default by all means. but what is to be done instead? the superior avenue is a combination of crisis resolution to curtail the panic and prevention measures to regain confidence. in more detail this means : 1. those countries under the rescue umbrella have to fully implement the conditions of the respective programs in order to return to a sustainable level of debt and regain competitiveness. during the adjustment process they receive financial aid from the luxembourg based european financial stability facility ( efsf ). in order to eliminate any doubts on the sufficient fire power of the efsf, governments of the euro area member states should provide appropriate leveraging of the fund – not to be confounded with monetization. it is also important that the efsf operationally can intervene in the secondary markets as soon as possible to tackle fundamentally unfounded distortions in the sovereign bonds markets. these distortions hamper the smooth functioning of the single monetary policy stance. 2. macroeconomic imbalances and unsustainable fiscal policies must