The Audacity of the Euro - WSJ

5 ways in which the eurozone tensions have manifested themselves in 2010 by STEPHEN FIDLER

The Wall Street Journal, December 24, 2010

How could European governments believe they would be able to hold together a common currency with a single monetary policy?and each of them pursue widely different economic policies in every other respect?

Discipline versus solidarity


If Greece is left to fall victim to the depredations of the financial markets, then it could set off events that could bring down the euro. But if you step in and provide Greece with a financial cushion to stave off the markets, how do you get it to correct its profligate ways?


Last resort versus pre-emption


Germany has shown itself as willing to act?but, under pressure from public opinion and the Bundesbank, only when the victim is at the point of drowning. This sets up an unstable dynamic in the financial markets, which would be avoided if governments acted pre-emptively...This may have created a misunderstanding in the markets over whether governments would be able or willing to save countries.


Bail-in versus bailout


Easing the burden on cash-strapped governments by reducing what they pay to bondholders is known in the EU jargon as the "private-sector contribution" to resolving debt crises. This is a "bail-in," as opposed to a bailout, in which bondholders get all their money back courtesy of government interventions.



Ireland decided against it encouraged in that decision by the European Central Bank, which feared such a move would have disastrous consequences on bank funding across the euro zone.



Angela Merkel, by contrast, pushed ahead with the principle that government bondholders should be prepared post-2013 to suffer losses if a government can't pay its bills.



She got her way and EU governments this month backed the principle as part of a future financial-rescue regime.


Precision versus ambiguity


ECB President Jean-Claude Trichet argued that certainty about a post-2013 rescue would have given speculators a one-way bet. Better to make losses a possibility, rather than a certainty, he argued. In the end, European leaders agreed with Mr. Trichet.


National sovereignty versus fiscal and financial union


So far, the evidence suggests member states of the euro zone want to pool their resources and coordinate policy to the minimum level that is also compatible with the euro zone's survival. What that minimum level is, isn't clear.