The future for Eurozone financial stability policy

The past few months have exposed serious problems in relation to
Europe’s ability to cope with financial stress. Placing the new Financial Stability
funds on a permanent basis, in the form of a new European Monetary Fund will
be required if Europe is to deal effectively with the serious debt problems of
some Eurozone countries. However, this fund should exist to manage sovereign
defaults in an orderly manner, not to prevent them altogether. Bank supervisors
also need to publish regular stress tests, change their regulations on the risk
weighting of sovereign debt and put new resolution procedures in place.
Together, these reforms will allow Europe to deal with future sovereign debt
problems without provoking a crisis.