In recent days some European statesmen have been trying to ‘restore confidence’ to the financial markets by assuring everyone that they have the political will to take whatever steps are necessary to resolve this latest serious eurozone crisis. But that is precisely the trouble. It was misplaced political will that created the eurozone in the first place.
Let’s remember some recent history. The Treaty of Maastricht set out five requirements for member-states wishing to enter the euro. Greece’s entry was delayed for two years; but the other eleven countries were all allowed to enter even though only one (tiny Luxembourg) actually met all five requirements.
Then Germany insisted on the ‘Stability Pact’, with France adding ‘Growth’. But after a few years Germany and France dumped the Stability and Growth Pact when it became inconvenient. The same thing happened to the Treaty of Maastricht’s ‘no bailout’ clause.
After all that, is it any wonder that financial markets have very little confidence in eurozone leaders. You can’t trust a word they say. Only the other day, President Barroso said that the recent downgrading of Portuguese bonds was unjustified – an assertion to which nobody attaches any credence.
What should be done? The answer is: recognise reality, at long last. What exactly does that mean? First, it means several eurozone member-states immediately declaring a substantial default on their government debt: for example, Greece, Ireland, Italy, Portugal and Spain. I don’t believe any of those governments will ever pay all their existing debts in full – and I doubt if anyone else really believes it either.
Second, the eurozone must be disbanded. The logic of a single currency area is substantial fiscal transfers from some European regions to others (like those from south-east England to the UK’s periphery). But this seems impracticable on two grounds.
People in transferor regions (such as Germany) are unlikely to accept such a burden willingly; and even in the anti-democratic European Union, no national government could get away with imposing it. Moreover there is a massive moral hazard for governments in the transferee regions (such as Greece). If they are to receive continuing large subsidies anyway, why should they ever get their economic houses in order?