The Euro on the Mend

In a few months, it will be four years since the eurozone crisis began – almost an eternity by historical standards. Much has been done to engineer a return to normalcy, but it is still too early to declare the job done and claim victory.

PARIS – A year ago the eurozone was in serious trouble. A series of policy actions – the creation of a rescue fund, a fiscal treaty, and the provision of cheap liquidity to the banking system – had failed to impress financial markets for long. The crisis had moved from the monetary union’s periphery to its core. Southern Europe was experiencing a sell-off of sovereign debt and a massive withdrawal of private capital. Europe was fragmenting financially. Speculation about a possible breakup was widespread.

Then came two major initiatives. In June 2012, eurozone leaders announced their intention to establish a European banking union. The euro, they said, had to be buttressed by transferring banking supervision to a European authority.

For the first time since the onset of the crisis in Greece, it was officially recognized that the root of the eurozone’s problem was not the flouting of fiscal rules, and that the very principles underlying the monetary union had to be revisited. The endeavor was bound to be ambitious. In the eyes of most observers, to reach the leaders’ goal of “break[ing] the vicious circle between banks and sovereigns” required centralizing authority for bank resolution and rescue.

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