Sunday, February 21, 2010
An Elephant lands on the tackle pile...
As if the EU needed more problems from market participants or intellectuals. Our favorite Palindrome chimes in:
by George Soros
Otmar Issing, one of the fathers of the euro, correctly states the
principle on which the single currency was founded. As he wrote in the
FT last week, the euro was meant to be a monetary union but not a
political one. Participating states established a common central bank
but refused to surrender the right to tax their citizens to a common
authority. This principle was enshrined in the Maastricht treaty and
has since been rigorously interpreted by the German constitutional
court. The euro was a unique and unusual construction whose viability
is now being tested.
The construction is patently flawed. A fully fledged currency requires
both a central bank and a Treasury. The Treasury need not be used to
tax citizens on an everyday basis but it needs to be available in
times of crisis. When the financial system is in danger of collapsing,
the central bank can provide liquidity, but only a Treasury can deal
with problems of solvency. This is a well-known fact that should have
been clear to everyone involved in the creation of the euro. Mr Issing
admits that he was among those who believed that “starting monetary
union without having established a political union was putting the
cart before the horse”.
The European Union was brought into existence by putting the cart
before the horse: setting limited but politically attainable targets
and timetables, knowing full well that they would not be sufficient
and require further steps in due course. But for various reasons the
process gradually ground to a halt. The EU is now largely frozen in
its present shape.
The same applies to the euro. The crash of 2008 revealed the flaw in
its construction when members had to rescue their banking systems
independently. The Greek debt crisis brought matters to a climax. If
member countries cannot take the next steps forward, the euro may fall