Monday, July 30, 2012

Banking Union Is Last Gambit to Save Euro Dream

by Luigi Zingales


July 30, 2012

The euro crisis isn’t Angela Merkel’s fault.

The real culprits are the founding fathers -- Francois Mitterrand, Helmut Kohl, Jacques Delors or Romano Prodi -- who created a common currency based on poor economics and worse politics. They knew their brainchild was flawed, and bet that future crises would force it to evolve. Unfortunately, they willfully ignored the dysfunction of Europe’s political structures, which allow Luxembourg, a country with fewer inhabitants than Tucson, Arizona, to veto any communal decision.

As the impending default of the Spanish regions amply demonstrates, a fiscal union without a transfer of political powers to a central authority is pure folly. Yet no European country is willing to relinquish its sovereignty; this is particularly true of those that have proved most irresponsible.

The euro’s founders designed this game of chicken on purpose, hoping that in a crisis either the periphery countries would blink and relinquish their sovereignty or Germany would cave and open its coffers.

Beyond their willingness to ignore the risks inherent in playing chicken, the euro founders didn’t take into account that even good outcomes of this game could be disastrous. On the one hand, without a transfer of powers, a German rescue would only postpone the disaster. On the other, a transfer of power under duress would fuel such deep national resentment that the idea of Europe would be destroyed for at least a generation.


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