Margaret Scott

The Greek Conundrum

Otmar Issing, one of the fathers of the euro, correctly stated the principle on which the common currency was founded: it was meant to be a monetary union, not a political one. But that principle is patently flawed, because, as the Greek crisis has demonstrated, a fully-fledged currency requires both a central bank and a treasury.

The euro is a unique and unusual construction whose viability is now being tested. Otmar Issing, one of the fathers of the common currency, correctly stated the principle on which it was founded: the euro was meant to be a monetary union, but not a political one. The participating states established a common central bank, but they explicitly refused to surrender the right to tax their citizens to a common authority. This principle was enshrined in Article 125 of the Maastricht Treaty, which has since been rigorously interpreted by the German constitutional court.

The principle, however, 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 euro’s creation. 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 step-by-step 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 thus that further steps would be required in due course. But, for various reasons, the process gradually ground to a halt. The EU is now largely frozen in its current shape.

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