While EU leaders are drafting a fiscal compact, the problem of intra-European real exchange-rate misalignments remains. This column argues that reducing imbalances implies a focus on competitiveness, and hence on the alignment of nominal-wage growth with labour-productivity growth.

The capital shortfall at EU banks is 8% higher than originally thought, according to the latest assessment from the European Banking Authority. This column examines the evolution of loan-to-deposit ratios in big European banks. It says banks have been buying back their debt securities, hoarding profits, limiting bonuses, and deleveraging. However, write-downs of sovereign debt have largely offset these efforts.

The synchronised poor growth in European countries can be explained by many factors, including trade and financial linkages. This column argues that firms’ domestic sales are directly affected by the fall in their exports. Using French firm-level data and the Asian Crisis as a foreign-demand shock, it finds that domestic sales were 5% lower for firms exposed to the crisis. It suggests that this is because the cash flow generated by exports may be used by firms to finance domestic operations in the short term.

European policymakers are confronting a heightened crisis characterised by a perverse and seemingly intractable interplay between sovereign debt pressures and financial-sector fragilities. This column argues that the payoffs from strengthening banks’ balance-sheets can still be large and, therefore, fiscal support is merited. But a more resolute strategy for winding down banks is also needed.

The lack of market confidence in European banks is fed by the uncertainty about Eurozone sovereign debt. This column argues governments and banking supervisors should agree a recapitalisation package well before Christmas. It adds that the required amount to be raised by each bank should be presented as a euro amount and not as a ratio so as not to tempt banks to cut down assets instead of raising capital.

With the sovereign debt crisis spreading across Europe, there is no shortage of suggestions on how to save the Eurozone. This column says exit rules are the silver bullet. It argues that exit rules would decrease the probability of a breakup of the Eurozone by enhancing market discipline, increasing the political bargaining power of EZ members vis-à-vis the profligate countries, enhancing internal discipline in the profligate countries, and reducing market uncertainty.

Stress in the interbank market has increased dramatically since July 2011, and bank stock market valuations have fallen by 22% on average for 60 of the most important banks subject to stress tests. This column argues that bank stock valuation has been affected by the banks’ exposure to Greek debt and that Greek banks were particularly affected. Holdings of debt of the other four periphery countries does not, however, appear to be a strong determinant of stock price movements.

A series of policy mistakes have put Europe on the wrong path. This column says that the current plan to enlarge the EFSF and recapitalise banks through markets will fail. The twin crises linking sovereign debts and banking turmoil need to be addressed simultaneously for Europe to avoid economic disaster.

How can Europe fix its sovereign-debt crisis? Many favour euro bonds, but those seem politically impractical because they would require supranational fiscal policies. This column proposes creating safe European assets without requiring additional funding by having a European debt agency repackage members’ debts into `euro-safe-bonds’.

Lorenzo Bini-Smaghi – Member of the ECB's Executive Board – has produced a brilliant defence of the no-default strategy currently pursued by the Eurozone authorities. This column argues that instead of ruling out highly plausible outcomes, the ECB should explain how it will react if defaults happen. By not making adequate preparations, it may be raising the odds of a very bad scenario.