Vox
March 2, 2012
The Eurozone’s problems are political as well as economic. The European leaders establishing the euro were, according to this column, guilty of putting political desire above economic reality. Their successors now trying to resolve the sovereign debt crisis are repeating that mistake, with potentially devastating consequences.
What makes the European sovereign debt crisis so intractable is that it is not just another crisis. It is two crises in one: A sovereign debt crisis and a policy response crisis. It is the latter which is doing the real damage.
The underlying direct causes are well known. The political desire for strong ties between European countries drove forward the European common market and the monetary union. History tells us that the success of such unions hinges critically on several factors, most importantly a common fiscal policy (Bordo et al 2011).
In the absence of these conditions, a monetary union is set to fail. The Maastricht criteria was devised by European leaders to avoid failure, but they then wasted no time in ignoring their own design.
By ignoring the necessary conditions, the European leaders who created the euro were guilty of hubris. Their decisions were not rooted in a pragmatic determination for a common good but rather in their own personal political ability to implement a monetary union. This moment of weakness is now the biggest threat to European integration.
This problem was compounded by the prevailing view that sovereign risk had somehow been eliminated – a view encouraged by European banking regulations stipulating that sovereign debt is risk-free. This both acts as a tax on other creditors and also sends a powerful signal. Interestingly, Greek debt is still considered risk-free by the regulators.
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