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Eurozone Dillemma

Europe at the crossroads

David John Williams  Jul 28, 2011

The inauguration of the European currency union over a decade ago was preceded by a long discussion of the need for fiscal probity and economic convergence within the Eurozone. The "convergence criteria" in the Maastricht Treaty (Article 125,1) resulted from this protracted debate.

The criteria decided on can be summarized as follows:
1) The inflation rate shall not be more than 1.5 percentage points higher than the average of the three best performing member states of the EU.
2) The ratio of the annual government budget deficit to GDP must not exceed 3%.
3) The ratio of total government debt to GDP must not exceed 60%.
4) The nominal long-term interest rate in the member state concerned must not be more than 2 percentage points higher than that in the three member states with the lowest inflation.

Culpable negligence on the part of the relevant EU authorities allowed Greece to ride roughshod over the Maastricht criteria with impunity for far too long. Had a lawsuit against Greece been filed at the European Court at least six years ago, the Greek public debt might have been reduced to manageable proportions by now. This is unfortunately no longer feasible. Whenever it attains the requisite degree of sustainable economic performance, Greece can rejoin the Eurozone. Failure to allow Greece to return to a national currency in the interim will entail intolerable burdens for European taxpayers and a dependence on financial markets that will seriously undermine the future stability of the Euro.

The specific situation of each and every Eurozone member confronting potential insolvency must be considered on its own merits. The voluntary option to leave the Eurozone would be the most viable course for any member state confronting potential insolvency. This would at all events entail far fewer problems in stabilizing the external parity of the Euro.

The costs of writing off Greek debt (in particular a 70% "haircut" on the value of Greek state bonds) will no doubt be very largely borne by EU taxpayers. However, the ultimate cost would be substantially lower than that of attempting to continue the current approach.

Greece should be permitted to withdraw from the Eurozone and allowed to re-establish its own national currency. Such a withdrawal must be accompanied by flanking measures including the provision of very substantial EU funding for the urgent and extensive economic restructuring as well as the personnel and advice required for the crucially important administrative reforms within Greece. The residual debt left after withdrawal from the Eurozone and subtraction of a 70% haircut on existing Greek state debt in conjunction with reintroduction of the Drachma would be guaranteed by the EU. Both capital and interest must be fully underwritten by Greek state assets. Greece would be required to pay a fixed interest rate of 4% for 20 years.

The European Central Bank has recently observed that by far the greatest current danger to the Euro is the threat of inflation. This is a danger that has been massively exacerbated by the financial indecisiveness of the European Council in the course of the past six months. For very sound reasons, the EU should in future consistently adhere to the "no-bail-out" clause enshrined in the Treaty of Maastricht (in force since February 1st 1993) and reaffirmed in the Treaty of Lisbon (in force since December 1st 2009).

David John Williams, B.Sc., can be reached via the email address:

Europe at the crossroads
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