Dr. Donal Donovan:

The design flaw is probably fairly well known. The Stability and Growth Pact, the original one, had two essential problems. First, some large countries were allowed to break the rules and get away with it. Of course, if that happens, then everyone else says, "We can't be too worried about that. We will do the same." The second problem was more fundamental - the problem of the cyclically adjusted balance - in that the Stability and Growth Pact either did not refer to the structural balance or, if it did, it got it wrong because it measured it wrongly. There was nothing in this EU-wide system which was going to detect the massive flaw in the Irish budgetary position. This was true, I understand, to a significant extent in a number of other countries, such as Spain.

The second design flaw was the absence of centralised bank supervision or transnational bank supervision. There were reasons for this, political and others. Everyone was supposed to look after their own banks, but the problem was that when the banking crisis came, whatever we had thought about fiscal stability or the Stability and Growth Pact, it was immediately torn up. That was because, when one has bank failures, inevitably, to some extent, governments find themselves with an obligation to at least put in some fiscal resources, so the fiscal ceiling goes out the window.

Those were the two fundamental flaws. They have been tackled to a significant extent in the reforms. We may have to wait until some stresses and strains appear in the system before we know how solid those reforms are and how firmly they will stick if the going gets a bit rough. We do not know yet.