The European Union and the Eurozone: The Danger that Lay Ahead. Jean Monnet/Robert Schuman Paper Series Vol. 11, No. 5, September 2011

Lorca-Susino, María (2011) The European Union and the Eurozone: The Danger that Lay Ahead. Jean Monnet/Robert Schuman Paper Series Vol. 11, No. 5, September 2011. [Policy Paper]

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Abstract

Excerpt from the Introduction: This paper summarizes the Greek situation by analyzing the two rescue plans in order to help the country avoid default, and also seeks to open the debate on whether Eurozone member states such as Greece should be left to its own devices and default on its sovereign debt; thus, this work briefly reviews and compares default cases such as Asia and Argentina. Also, it aims at shedding light on the actions that have been taken to save the rest of the euro area countries in difficulties and pinpoints that the measures taken are not enough to settle the financial markets. After two years of crisis and panic, it is clear that the instability in the Eurozone will only disappear with the introduction of a Eurobond; however, this financial requisite requires fiscal unity, which is the one integration step that is clearly not accepted by Eurozone governments as of summer 2011. Finally, this paper highlights the role of the banking system in underpinning the stability of the European Union in order to bring stability and trust to the union. This paper concludes that the EU faces a make or break moment in summer 2011. The efforts to save Greece and other countries in difficult situations are not working. The current course of action is demonstrating that the European Union and the euro may not be saved for a number of reasons. Firstly, a financial crisis is being worked out by politicians representing different sovereign countries. These politicians are therefore defending their national interests; that is, their tax payers’ money. Secondly, the EFSF, worth €440bn, is simply not enough to cover both the existing and expected financial necessities. Unless it is agreed that this fund enjoys a safety net of a few trillion euros to rescue countries in difficulties, the markets are not going to calm down. Also, there should be a fiscal union and a European bond, which is an option that is not accepted by some EU member states. Still, European politicians believe that the European Central Bank should follow the Federal Reserve Bank’s footsteps. However, the Fed is the central bank of a fiscally unified country, the ECB is not. Thus, politicians should understand that the European Central Bank has a limited "obligation" to help those countries in difficulties.

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