Vox
July 15, 2011
The Eurozone crisis is tearing Europe apart. This column argues that Eurozone leaders must (i) agree to create European-level institutions to monitor national budget and banking policies and (ii) draw a line between solvent and insolvent Eurozone nations before the markets do it for them. It adds that we are now discovering that a loss of sovereignty became inevitable the day we decided to create the single currency.
The financial crisis that is tearing Europe apart is caused in part by a misperception – the idea that financial market discipline can be relied upon to induce countries to balance their budgets. According to this leitmotiv, if a country were not forced to preserve the confidence of the markets, its incentives would be distorted; moral hazard would induce excessive debt accumulation.
This idea, which is certainly valid for private institutions, cannot be applied to the Eurozone countries. As long as this idea persists, it will be difficult to overcome the crisis.
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