The euro will face bigger tests than Greece

Otmar Issing (Otmar Issing), one of the fathers of the euro, correctly formulated the principle that established the single currency. As he wrote in the FT last week, the euro was intended for the monetary union, not political. States parties have established a common central bank, but did not want to give a general regulator of the right to levy taxes. This principle was enshrined in the Maastricht Treaty and since then, literally interpreted the German Constitutional Court. The euro was unique and unusual design, the viability of which is now checked.

The design is clearly spoiled. Full-fledged currency requires the central bank and treasury. Treasury is not necessarily used for taxation of citizens in everyday life, but this function must be used in times of crisis. When the financial system is in danger or collapsing, the central bank can provide liquidity, but the Treasury can deal with solvency. This well-known fact, which must be known to all involved in the creation of the euro. Issing admits that he was among those who believed that "the beginning of monetary union without a political union puts the cart before the horse.

The EU has started, just putting the cart before the horse: establishing limited, but politically achievable goals and deadlines, knowing that they are inadequate and demanding further steps in that direction. However, for various reasons, the process of gradually ceased. The EU is now largely frozen in its current form.

The same applies to the euro. The collapse of 2008 showed an error in the creation, when members of the Union had to rescue their banking system itself. The debt crisis of Greece brought the case to the grand finale. If the participating countries will not be able to take the next step, the euro could collapse.

The original design of the euro assumed that the participants will abide by restrictions imposed in Maastrihe. However, the previous government of Greece egregiously violate these restrictions. The government of George Papandreou (George Papandreou), which was chosen last October in order to restore order and opened the data that the budget deficit reached 12.7% in 2009, which shocked and European authorities, and markets.

European authorities have approved a plan that would reduce the deficit gradually, first to 4%, but the markets are not reassured. Premiums on risks to the Greek government bonds continue to exceed 3%, thus rendering most of Greece, the benefits of joining the eurozone. If this continues further, there is a real danger that Greece will not be able in principle to emerge from its predicament. Further budget cuts could lead to a decrease in economic activity, reduce tax revenues and the deterioration of a debt-to-GDP. Given these threats and the absence of outside assistance, risk premiums will not return to their previous levels.

The situation is exacerbated by the market for credit default swaps, which brings benefits to those who bet on failure. When buying credit-default swaps, the risk will automatically fall if they are wrong. This situation is the opposite in case of sale where the error is automatically increases the risk. Speculation credit default swaps could significantly increase the risk premium.

Recognizing this need, at the last Ecofin meeting, EU finance ministers for the first time pledged to "guarantee the financial stability in the euro area as a whole. But so far they have not found a mechanism to do this because the current institutional arrangements do not meet even the 123 article of the Lisbon Treaty, which provided the legal basis for such action. The most effective solution would be to issue jointly and severally guaranteed Eurobond refinancing under, say, 75% of the debt that you need to pay at the time when Greece will reach its goals, leaving Athens to finance its needs as it is they need. This would significantly reduce the cost of financing, and would be equivalent to a conditional allocation of IMF credit tranches.

Currently, however, politically it is impossible, as opposed to Germany to be a pocket for their profligate partners. Because to be found temporary arrangements.

Papandreou Government was determined to correct past abuses, moreover, it has considerable public support. There were mass protests and resistance from the ruling old guard, but it seems the public agrees with the rate of the economy, yet we see progress in correcting fiscal abuse, and there are a lot of mistakes on which to work. Such interim relief should be enough for Greece, but not enough for Spain, Italy, Portugal and Ireland. Together they make too much of the eurozone to get help the same way. Salvation Greece still leaves in doubt the future of the euro. And even if we manage to cope with the current crisis, what to do with these? Obviously, you need the following: need a well-organized Eurobond market. The question is, will there be enough political will to make these steps.

Financial Times