The document discusses the ongoing crisis facing the European Monetary Union. It argues the Union was poorly constructed as political priorities took precedence over economic prudence. Member states also showed fiscal irresponsibility through growing public debts. This caused doubts among debt holders, increasing borrowing costs for vulnerable countries. The crisis was further exacerbated by economic downturns in several countries and spillover effects across financial markets. Measures adopted so far may not be enough to solve the problems plaguing the Union and further breakups remain a risk if issues are not addressed.

1. /JAIME REQUEIJO * /
The European Monetary Union:
the Never-Ending Crisis
1. Introduction; 2. The Euro: a Badly Constructed Building; 3. The fiscal
Spillover; 4. The Consequences of the Doubtful Debt; 5. Contributing
Factors; 6. Main Measures Adopted to Solve the Monetary Union Crisis; 7.
Outcome of the Measures Adopted so far; 8. Consequences of the Breakup
of the Euro; 9. The Missing Link
* Ph.D in Economics, BA in Law, Former Civil Servant attached to the Ministry of
Commerce, Emeritus Professor of Applied Economics (UNED and IEB).Former positions
include : General Director for Imports and Tariff Policy at the Ministry of Commerce,
Chief Executive Officer of Caja Postal de Ahorros, Member of the Board of Banco
Zaragozano, Director of the School of Financial Studies (UCM) and Member of the
Board of Banco de España.
His fields of research focus on monetary and financial matters, international economics
and the Spanish economy. He has written seven books and published more then
seventy papers in Spanish economic reviews..
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2. The European Monetary Union: the Never-Ending Crisis
1. Introduction
The constant financial trepidation afflicting different countries
of the Eurozone, and which threatens the survival of the single
currency, is not the result of random events. In our view, they can
be put down to four fundamental reasons. First, the Monetary
Union is a badly constructed building as political urgency prevai-
led over economic prudence. Second, there is the fiscal irresponsi-
bility of many member state governments, an irresponsibility that
has materialized as hefty public debts. Thirdly, the doubts being
generated among the debt holders, mainly institutional investors
and banks, and which has led to significant fluctuations in the
interest rates of those assets and, in general, to a cost hike for the
issuers. Four, what we could call the contributing aspects: the spi-
llover and contagion effects that batter the financial markets,
effects linked to the opinions of the rating agencies and, on occa-
sions, to the worst-case scenarios of the International Monetary
Fund regarding the medium-term performance of the European
Union economies and, particularly important, those of the
Monetary Union.
Faced with that panorama, and given the absence of clear solu-
tions, there are three questions raised by many observers of the cri-
sis. The first question is what the measures are that have been
adopted so far to try and avoid the recurring disruption. The
second question is whether those measures, or further ones
currently under debate, will be sufficient to solve the problem or,
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3. The Future of the Euro
on the other hand, will the fate of the Monetary Union be to totally
or partially break up? The third question is if the Monetary Union
proves to be totally unviable and the national currencies have to be
re-introduced, what will the consequences be of the failure of the
euro?
This paper seeks to provide a reasoned explanation of the cau-
ses underpinning the current major upheaval and it also aims to
answer the aforementioned three questions regarding the measu-
res, their outcome and impact of a possible breakup of the euro.
The paper ends with a short section considering the solution that
should be adopted to keep the Monetary Union in place.
2. The Euro: a Badly Constructed Building
Even though the dream of the single currency had been always
present since the Treaty of Rome, the definitive decision, contained
in the Maastricht Treaty, is the outcome of the political desires of
France and Germany. Of France as French governments believed
that having a single European currency would avoid the constant
pressures on the franc, pressures that usually led to the devaluation
of its currency. Of Germany as accepting the single currency meant
highlighting the European vocation of the most important
European economy after reunification in 1990, a process that ope-
ned up many raw wounds – particularly in France. Driven by those
dual interests, the currency unification project prospered, not wit-
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4. The European Monetary Union: the Never-Ending Crisis
hout significant frictions, until it became reality in 1999, the year
when eleven countries, including Spain, ceded their monetary
autonomy to the European System of Central Banks; Greece would
join in 2001, followed by other countries until it reached the
current seventeen members.1
Joining the Eurozone required the countries to meet the so-
called Maastricht convergence criteria, those rules aimed at ensu-
ring that the different economies had a certain nominal similarity.
During the year prior to the Compatibility Test, the inflation rate
could not be more than 1.5 points over the average of the three
most stable candidate countries; as the end of that year, the public
sector deficit could not exceed 3% of the Gross Domestic Product
or the debt be greater than 60% of that figure; the candidate
country had to have been part of the European Monetary System
during the two years prior to the test and without its currency
having experienced significant fluctuations; and, during the pre-
vious year, the long-term nominal interest rate had not exceeded
the average of the three most stable countries by more than 2
points.2 After the failure of the European Monetary System in
1993, only the other three criteria were required to determine
which countries could join the euro, and those criteria have conti-
1 Note that the countries that initially joined the Monetary Union were Germany,
Austria, Belgium, Spain, Finland, France, the Netherlands, Italy, Luxembourg and
Portugal. Greece joined later and, successively, followed by Slovenia, Cyprus, Malta,
Slovakia and Estonia.
2 Article 121 of the 1992 Maastricht Treaty.
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5. The Future of the Euro
nued to be applied to accept the application for entry of the suc-
cessive candidates.
Please note that those criteria were only required at the time of joi-
ning. The subsequent restrictions were laid down by the 1997
Stability and Growth Pact, aimed at maintaining budgetary stability
within the Union. Thus, the country could not exceed the annual
limit of the deficit and the debt: 3% and 60% of the GDP respectively.
Exceeding those limits meant that the European Commission would
implement the excessive deficit procedure, which would result in the
country in question having to face certain penalties. Subsequently, in
2005, the rules were reformed so that the deficits tested were not the
nominal but rather the structural ones. Therefore, not only the
current deficit, but also the sustainability of the long-term public debt
was taken into account in the supervision and monitoring process
entrusted to the European Commission.3 In short, and right from the
outset, the nominal similarities that a series of economies with clear
real differences had to offer were what seemed to matter to European
leaders. And, proof of that difference could be seen when, in 2002 –
Greece had already joined – the typical deviation of labour producti-
vity per hour worked, calculated as CWA was 29.46;4 which clearly
showed the different competitive capacity of the different countries,
right from the start. Those differences were a hint of the future sym-
3 See “The Stability and Growth Pact: Public Finances in the Euro Zone” of the Sub-
Directorate General for Financial and Economic Affairs of the European Union, SCI
Economic Gazette No. 2906, 16-28 October 2007.
4 Prepared using the Eurostat data for the twelve member countries.
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6. The European Monetary Union: the Never-Ending Crisis
metric upheavals to come in the zone, and that group of countries,
for different reasons, did not constitute – or constitutes – an optimum
monetary zone. And thus, the European Monetary Union was built
on quicksand, quicksand that would begin to overwhelm it as soon
as the fiscal irresponsibility of some of the governments made a sig-
nificant dent in the building overall.
3. The Fiscal Spillover
Can governments of countries with weak currencies issue debt in
their currency and ensure that attracts foreign investors? The like-
lihood is minimum as the potential investor will think that, at some
point, the currency will depreciate substantially, leading to a loss.
Can countries with a strong currency do so? They can because
the investors will not fear the losses following on from devalua-
tion. And proof of this is that institutional or private investors, resi-
dent in a wide variety of countries, have traditionally kept debts in
dollars, marks, Swiss francs or yens in their portfolios.
The euro sought to be a strong currency right from the outset.
This strength was based on the monetary policy of the European
Central Bank, whose primary objective would be to keep prices sta-
ble.5 And which, furthermore, represented a series of important
5 Art. 2 of the Statues of the European System of Central Banks and the European
Central Banks.
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7. The Future of the Euro
economies, with Germany at the head. Moreover, the exchange
rate risk disappeared for member countries and it therefore facilita-
ted the setting up of a large financial market in euro.
The appearance of the euro, therefore, meant the disappearance
of the original sin experienced by countries with weak currencies:
the difficultly of leverage in other currencies, which meant that
they were at huge risk of financial fragility.6 The way was therefore
left clear for governments of euro countries that had found it diffi-
cult to finance themselves in other currencies prior to joining the
single currency, to easily raise leverage in the powerful financial
market of the euro. The only thing missing was the imperative need
to do so.
And that imperative need arrived with the economic crisis,
which began in 2007, and with the general downturn in the rates
of growth, a fall that is reflected in the following table.
It should be noted that even through the downturn in growth
was widespread, the countries with the sharpest recession were
Ireland, Italy, Portugal and Spain within the initial group of twelve
countries.
When the growth rate shrank, which was greatest in those cases
with the sharpest change in cycle, the budgetary revenue fell and
6 See Eichengreen, B. & Haussmann, R. “Exchange Rates and Financial Fragility”, NBER
WP 7418, 1999.
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8. The European Monetary Union: the Never-Ending Crisis
Table No. 1. Average Growth of the Eurozone (17 countries)
Average Average
Country
2004-2006 2 0 0 7 -2 0 1 1
Germany 1.87 1.20
Austria 2.90 1.30
Belgium 2.57 1.12
Cyprus 4.07 1.68
Slovenia 4.73 0.74
Slovakia 6.70 3.80
Spain 3.67 0.26
Estonia 8.43 -0.14
Finland 3.70 0.80
France 2.20 0.52
Greece 4.07 -1.90
The Netherlands 2.53 1.14
Ireland 5.03 -0.82
Italy 1.27 0.52
Luxembourg 4.93 1.28
Malta 2.33 2.20
Portugal 1.27 -0.20
Source: Own preparation, using Eurostat data (Europe in figures, 2012)
the deficits appeared or increased and grew even further if the bud-
gets included automatic stabilisers, by virtue of which the fiscal
policy became expansive in periods of recession, and even more
expansive if the governments relied on additional fiscal stimulus to
overcome the economic crisis.
All of these are reasons have been given to explain the rapid
increase in the public sector debt, as can be seen in Table No. 2.
Given that panorama of slow growth, or decline, and of growing
public debts, it comes of no surprise that debt holders would soon
have greater misgivings – misgivings that particularly affected those
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9. The Future of the Euro
Table No. 2. Evolution of the public debt of the eurozone (% GDP)
Country 2007 2011 Growth
Germany 65.2 81.8 25%
Austria 60.2 72.2 20%
Belgium 84.1 97.2 16%
Cyprus 58.8 64.9 10%
Slovenia 23.1 45.5 97%
Slovakia 29.6 44.5 50%
Spain 36.2 69.6 92%
Estonia 3.7 5.8 57%
Finland 35.2 49.1 38%
France 64.2 85.4 33%
Greece 107.4 162.8 52%
The Netherlands 45.3 64.3 42%
Ireland 24.9 108.1 334%
Italy 103.1 120.5 17%
Luxembourg 6.7 19.5 191%
Malta 62.4 69.6 12%
Portugal 68.3 101.6 49%
Eurozone 66.3 88 33%
Source: Own preparation, with data from the Statistical Annex of European Economy,
autumn 2011. The data refer to the gross debt as they are the liabilities that the govern-
ment must face.
countries where the recession was combined with spiralling debt and
the few prospects for recovery. It was, therefore, foreseeable that any
event that affected the debt of a country would lead to a chain reac-
tion that would challenge the financial stability of the Eurozone.
That event was Greece going into virtual receivership on 23 April
2010: on that date the Greek government asked the International
Monetary Fund and the European Union for a 45,000 million euro
loan to meet their financial obligations, four months after Fitch, the
rating agency, had downgraded its debt.
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10. The European Monetary Union: the Never-Ending Crisis
4. The Consequences of the Doubtful Debt
From then onwards, there were constant indications of concern
in different channels about the sovereign debts with a question
mark over them. First of all, the increase of the risk premiums of
certain securities; secondly, the increase in the cost of the credit
insurance for the same securities; third, the greater occasional cost
of the new issues by the countries under suspicion, the so-called
peripheral countries: Greece, Portugal, Ireland, Italy and Spain.
The three aforementioned reactions clearly moved in the same
direction. As is known, hikes in risk premiums on the secondary mar-
kets consist of discounts on the value of the securities, discounts that
are equivalent to an increase in the relevant interests and which are
compared to the interests of the benchmark debt, the German one,
for the same market. In its simplest version, credit insurance (Credit
Default Swaps) are contracts by virtue of which, and by means of
paying a premium, the bondholder is guaranteed the collection of
the nominal amount. And in increase of the risk premiums and the
price of the swaps affect, by definition, the cost of the new issues: the
more expensive the premiums and swaps become, the higher the
interest that the new issues should offer and the greater the cost for
the relevant governments. All of which tends to worsen the financial
situation of the governments, a situation that will enter a downward
spiral if the average interest rate of the outstanding debt is greater
than the growth rate of its economy.
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11. The Future of the Euro
5. Contributing Factors
Current financial markets are markets of news and rumour
mills.7
The first report on how the turbulence develop and reflect veri-
fiable facts: the initial request for help by the Greek government;
the successive austerity measures demanded by the European aut-
horities and the International Monetary Fund for the bailout to be
granted; the social response to the austerity plans in different
countries or the downgrading of the sovereign debts of different
countries of the Eurozone, including France. All of the events show
the constant severity of an ongoing crisis.
The second are, in general, interpretations, opinions that are
usually transmitted through the different media, whether they are
journals, the daily press, television and radio programmes or news
spread online. Some are reasonably based opinions that are trying
to consider the difficult situation of the Monetary Union and to
offer some type of solution.8 Others are purely and simply seeking
to be alarmist, to the point of suggesting to their readers that they
7 An extensive study into the subject of rumours is by Mark Schindler: “Rumors in
Financial Markets”, Wiley&Sons, UK, 2007.
8 Examples of opinions of this type are “Beware of fallen masonry”, The Economist,
26/11/2011, and those expressed by K. Rogoff in the interview published by Spiegel on
27/2/2012, entitled “Germany Has Been the Winner in the Globalization Process”.
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12. The European Monetary Union: the Never-Ending Crisis
should stock up on food to survive the chaos that will reign, on the
world scale, when the euro implodes and triggers a financial tsu-
nami that will spread over the five continents.9
Furthermore, there are the constant threats of downgrading the
sovereign debt by the three major US agencies – Standard & Poors,
Moody’s and Fitch –, the three who were so optimistic when it came
to US mortgage junk bonds,10 and the doubts expressed, from time
to time, by the International Monetary Fund regarding the future of
the euro zone. There is also the risk that the whole set of views,
from the most founded to the most alarmist, will awaken many
fears and the prophecy will become self-fulfilling: the disaster will
occur because the avalanche of negative opinions will set it in
motion.
6. Main Measures Adopted to solve the Monetary Union
Crisis
At the time of writing (April 2012), these measures have invol-
ved setting up general bailout funds, the approval of a Greek Loan
9 Read “Will Greek Sovereign Debt Default on March 23” by Patrik Heller, Coinweck,
22/2/2012 (online).
10 In the opinion of John Kiff, from the International Monetary Fund, the opinion of
the agencies increases the uncertainties on the sovereign debt markets, due to the
importance that the participants on those markets seem to attribute to them. See his
article “Reducing Role of Credit Ratings Would Aid Markets” IMF Survey Magazine,
29/9/2010. Also Arezki et al: “Sovereign Rating News and Financial Markets
Spillovers”, IMF, WP/11/68.
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13. The Future of the Euro
Facility, the interventions of the European Central Bank and the
fine tuning of a new Treaty on Stability, Coordination and
Governance of the Monetary and Economic Union.
In 2010, the European Financial Stability Fund was set up,
whose aim is to facilitate resources to euro countries in financial
difficulties. It is a company whose headquarters are in Luxembourg
and its loan capacity is to the tune of 440,000 million euros.11 To
grant a loan to a Euro country, the government of the country has
to request it and sign an austerity programme. Part of the loans to
Ireland and Portugal were arranged through that Fund.
In 2011, the European Financial Stabilisation Mechanism was
created for a similar purpose. It is an institution, supervised by the
European Commission, which obtains its resources from the capi-
tal markets by means of issuing bonds underwritten by the
European Union budget. It may provide aid to members of the
European Union, whether or not they are members of the
Eurozone, is compatible with aid provided by other channels and
also requires the prior approval of an austerity package. Loans
have also been granted through this programme to Ireland and
Portugal.
The two aforementioned funds would duly be subsumed in the
European Stability Mechanism), agreed by the Eurozone countries
11 All the data referring to the bailout fund and to the Greek Loan Facility are taken
from European Commission official documents.
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14. The European Monetary Union: the Never-Ending Crisis
in February 2012 and which should begin to function in July of
that year. Its aid will not be limited to granting loans, but it will
likewise be able to acquire bonds issued by the member countries,
either on the primary or on the secondary markets, and facilitate
resources aimed at recapitalising financial institutions. In princi-
ple, it would have 80,000 million euros of capital and an initial cre-
dit capacity of 500,000 million euros. In May 2010, the members
of the Eurozone bilaterally decided to lend Greece 80,000 million
euros that, in addition to the 30,000 million from the
International Monetary Fund, meant that the first Greek bailout
totalled 110,000 million euros. At the end of 2011, and 73,000
million euros had been paid out from that fund, a payment that
required an austerity undertaking. On 14 March 2012, a new bai-
lout programme was approved, with substantial write offs for the
creditors and austerity obligations for the Greek Government, to
the tune of 130,000 million euros, an amount which includes the
International Monetary Fund contribution of 28,000 million
euros. The purpose of that financial support, which will last until
2014, is to bring the Greek public deficit under the 117% of its
Gross Domestic Product by 2020. Part of that bailout will be chan-
nelled through the European Financial Stability Fund.
A crisis intervention of particular importance is by the
European Central Bank, an intervention channelled in two lines.
In a non-recurrent way, the Bank acquires debt on the secondary
market, which reduces the risk premium and means that the issues
of new securities are at a lower cost. On the other hand, it lends
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15. The Future of the Euro
resources at a very low interest rate to financial brokers – its basic
rate has remained at 1% for some time – which means that the
banks of the worst hit countries acquire part of the new issues.
They, therefore, facilitate the placement of securities, securities that
are profitable for the financial institutions and less costly for the
issuers.
On 2 March 2012 and after many debates in the European
Council, the representatives of twenty-five countries of the
European Union – as neither the United Kingdom nor in the
Czech Republic wanted to sign up – signed the Treaty on Stability,
Coordination and Governance in the Economic and Monetary
Union. Even though the new Treaty was signed by members of the
European Union that are not part of the Monetary Union, its fun-
damental proposal is to force the euro countries to ensure that
their public finances are balanced. Further proof of that purpose is
that the Treaty will come into force when it has been ratified by at
least twelve euro countries.
A key aspect of the agreement is the so-called Budgetary
Agreement that forces those countries to tighten their budgetary
discipline and which introduces the balanced budget rule, a rule
that must be included in national legislation and, preferentially, in
the Constitution. The structural deficit must not exceed a specific
limit and cycle deficits are accepted, resulting from substantial
downturns in the economic activity, provided that they do not
alter the balanced budget rule in the medium term. And, in the
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16. The European Monetary Union: the Never-Ending Crisis
case that the deficit exceeds the permitted limit, a series of auto-
matic penalties are envisaged.12
7. Outcome of the Measures Adopted so far
Judging by the data that appeared in early April 2012, recovery
from the downturn has not yet started, in particular, as far as the
peripheral countries are concerned: volatility remains high both
on the sovereign debt markets and on the variable income ones –
in the case of the latter, the downward trend is reflected by the
drop in share prices of the most exposed banks to the sovereign
debt of those countries – and the doubts persist regarding the capa-
city of several of them to meet their obligations. Which is not at
all strange for several reasons.
The required restructuring to bring the debt back to more bea-
rable levels would hinder, in the short term, the growth capacity of
the five countries, as economic recovery would be further compli-
cated by the shrink in their tax revenue. And all of this would
occur in a climate of recession and economic stagnation that appe-
ars to have taken hold of the European Union, over all, and the
Monetary Union, in particular.13
12 The full text of the Treaty can be seen at the European Council website.
13 The forecasts can be seen at the European Economic Forecast, Autumn 2011 (online).
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17. The Future of the Euro
The situation of Greece is at the forefront of all the economic
analysis of the euro zone as very few believe so far that the recently
approved second bailout will result in the country solving pro-
blems and many believe that a third bailout will soon be on the
cards. And those doubts regarding the future of the Greek economy
are spreading to the rest of the peripheral countries and, to a great
extent, to the very future of the Monetary Union.
Despite the measures approved so far, the decision processes have
dragged on as an agreement needs to be reached by country repre-
sentatives, who are very aware of the opinion of their citizens, and
by representatives of community institutions. Long processes, where
multiple opinions, sometimes discrepancies, are mixed, that increa-
se the uncertainties regarding the future of the euro, even though
the disappearance of the single currency could raise much more
wide-ranging problems than the current ones trying to be solved.
8. Consequences of the Breakup of the Euro
The breakup of the Monetary Union could occur should one or
more member states decided to leave the single currency and rein-
troduce their own currency. That split could either be due to the
departure of one or more weak-economies or to one or more
strong-economies breaking. In either of the two cases, the Union
would be broken.
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18. The European Monetary Union: the Never-Ending Crisis
From the legal perspective, such a possibility does not currently
exist as the Maastricht Treaty does not include any clause that
opens up the way; only the 200714 Lisbon Treaty accepts the
voluntary withdrawal of a member state from the European Union,
but says nothing about the Monetary Union. This may be because
the architects of the common currency always thought that, given
that the single currency was an extremely important step in the
political and economic construction of Europe, the decision of
each country should be irrevocable.
Yet, leaving the legal aspect on one side, despite its importance,
the collapse of the Eurozone would lead to a series of disastrous con-
sequences for the country or countries that had left the euro, for the
Eurozone overall and for the world economy.
Let us first consider the departure of a weak economy. The mere
presumption by its citizens of leaving would result in a large-scale
transference of deposits from its banks towards other banks located
outside the country, given that nobody would want to see their euro
assets converted into balances in the devalued currency; the
Government in question would be forced to impose, as a preventive
measure and prior to the decision to abandon the euro, a limit on
withdrawing deposits and a strict exchange rate control. As it is to be
supposed that part of the private debt of the country would be held
by foreign institutions, individuals and companies would find them-
selves in the worrying situation of having to face such debts with a
14 Art. 50 of the Treaty regarding the voluntary withdrawal for a member country.
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19. The Future of the Euro
national currency of a lower value. With respect to the sovereign
debt, the problem would be the same: the Government would be
compelled to honour it at a higher cost. And the internal economic
adjustments would be of such a magnitude that the main purpose
sought by returning to the national currency – regaining the exchan-
ge rate policy and, thus, making the exportable goods more compe-
titive – would take many years to occur. Without even going into the
social and legal conflicts that would occur, in that country, as a seve-
re recession for an unforeseeable length would occur.
If the country decided to abandon the euro were a very strong
economy, would there be more advantages than disadvantages? It is
not easy to answer that question, for two reasons. First of all, becau-
se the foreseeable outcome is that its currency would appreciate,
which, even though it would mean an initial advantage, would also
raise problems. For example, and from that moment onwards, its
banks would have deposits in the new currency, but it is to be sup-
posed that part of its assets would be for operations with residents
in the euro zone and, therefore, the financial brokers would have to
face losses through that channel, and would moreover have to face
its fiscal obligations in the new currency. Second, and this is the
more important aspect, the appreciation of its currency would affect
its competitiveness in the remaining euro countries – the main mar-
ket of all the countries of the Monetary Union – which, undoub-
tedly, would hit its growth capacity for many years to come.15
15 On these aspects, see “Euro break-up: the consequences” of UBS Investment
Research, 6/9/2011 (online). Also the opinions of Eric Dior: “Leaving the euro zone: a
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20. The European Monetary Union: the Never-Ending Crisis
The departure from the Eurozone of any country, or several
countries, would break up the Monetary Union in both political
and economic terms. In economic terms, because the growing dis-
trust of all its citizens would lead to substantial capital flights and,
probably, to the collapse of different financial systems, which
would cloud the very limited economic perspectives of the zone
and would lead to a long recession. In political terms as its inter-
national clout would be considerably reduced, based on a situa-
tion, the current one, which is not particularly brilliant: its lack of
political unity and its indecisiveness, which characterises it as a
soft power area clearly reduce the international presence of a zone
that, we should not forget, is, taken overall, the second economy
and the second market of the world.16 Its breakup and the ensuing
recession would cloud the international presence of that group of
countries to unimaginable limits. And without taking into account
the likely decline of the European Union.
It is interesting to observe the distancing that many non-
European analysts show when considering the spasms of the
Monetary Union. Which is the equivalent, in many cases, to con-
sidering them as a local problem: the Eurozone is having to bear
great tensions, arising from the sovereign debt crisis, and there is
a question mark over its survival. And they go no further. They
forget that, in a world of fully integrated financial markets, the
user’s guide”. IESEG School of Management (Lille Catholic University), October 2011
(online).
16 With World Bank and World Trade Organisation data for 2010.
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21. The Future of the Euro
Eurozone crisis would have a global impact. For two reasons. First
of all, because a good part of the sovereign debt is in bank port-
folios; secondly, because the credit insurances (CDS) are, pos-
sibly, held by financial institutions around the world.
In December 2011, 513,000 million euros of public debt of the
five peripheral countries (Greece, Ireland, Italy, Portugal and Spain)
appeared in the portfolios of European banks.17 If we take into
account that the financial institutions around the world are linked
by a series of international transactions, it is not difficult to con-
clude that the breakup of the euro would have global repercussions.
In the March 2011, the CDS linked to European sovereign debt
stood at 145,000 million dollars.18 Neither of these two figures are
high but they are sufficiently important for the upheavals of the euro
zone, following on from the breakup of the currency, to be transferred
to other regions of the world with substantial multiplying effects.
It therefore can be supposed that the Monetary Union will
manage to overcome this crisis. Yet, from our point of view, the
current firewalls – the bailout funds, however they are called – and
the budgetary obligations, included in the Treaty on Stability,
Coordination and Governance, will not be enough to overcome
17 Jenkins, P. y Stabe, M: “EU banks slash sovereign holdings”. With European Bank
Association data (online).
18 ISDA: “The Impact of Derivative Collateral Policies of European Sovereigns and
Resulting Basel III Capital Issues”, 19/12/2011 (online).
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22. The European Monetary Union: the Never-Ending Crisis
the current problems and ensure that the Monetary Union is the
threshold to what, when all said and done, has been what they
wanted to achieve through the single currency: a certain degree of
Political Union. An additional link is therefore now needed.
9. The Missing Link
The endeavours aimed at solving the crisis have so far been along
two paths: creating financial instruments to avoid the bankruptcy of
some governments – the most worrying case is Greece – and strengthe-
ning the obligation of member countries to reach and maintain a rea-
sonable budgetary balance. Important steps, but which have not mana-
ged to eliminate the continuous tension that has been observed in the
financial markets, tension that the interventions of the European
Central Bank have only managed to soften. Soften, not eliminate.
Note that all the actions undertaken so far – bailout and rules –
do not imply any joint liability. It involves combining financial aid
and remembering that fiscal policy in a single currency arena must
be very similar and very prudent in all member countries. The lia-
bility therefore falls on the Government of each country.
Yet these measures will not be sufficient if the aim is to shore up
the badly constructed building of the Eurozone. It would be neces-
sary to show that the members of the Monetary Union are capable
of jointly and severally assuming liability of the problems of all its
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23. The Future of the Euro
members. And what is necessary, to affirm that joint liability, is to
issue the so-called Eurobonds or Stability Bonds; in other words,
bonds jointly issued that will replace, totally or partly, the current
sovereign debt. That measure, that would be a highly important
step forward in the construction of the common building that is
based on the single currency, would result in three far-reaching
consequences: the sovereign debt crisis of some countries would
be rapidly alleviated; the cost of future issues would be reduce as a
consequence of the overall solvency; and the financial system of
the Eurozone would be more resistant to any future upheaval, and
the overall financial stability would therefore be strengthened.
This decision necessarily implies the setting up of a common trea-
sury and likewise the application of a fiscal policy.
Clearly, that decision would entail many economic difficulties
and highly complex political problems, as the citizens of the most
prosperous and stable countries of the Union will be not very
willing to accept that type of shared liability which they would see
as the financial problems of others being placed on their shoul-
ders. Yet we should not forget that that possibility has already been
raised by the European Commission itself, precisely to attain those
objectives.19 And we should not forget, above all, that, as I have
attempted to explain in this paper, the end of the Monetary Union
is not a zero-sum game, where there are winners and losers; it is a
negative sum game, where everyone loses.
19 See European Commission: “Green Paper on the feasibility of introducing Stability
Bonds”, 23/11/2011.COM (2011) 818 final (online).
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