Ambiguity has been central to the European project. The European Union is built on what Cass Sunstein, the US legal scholar, describes as incompletely theorised agreements: it is often possible to reach consensus on a course of action even if there are different reasons for and objectives behind such action. The evolution of monetary union in Europe was an incompletely theorised agreement. For Germany, it was a means of extending the economic discipline of the Bundesbank to more profligate trading partners. For France, it was a way of putting European monetary policy under greater political, and particularly French, control.
The scale of global capital flows means that political rhetoric is always likely to be challenged by market participants. Such challenges make politicians angry, which is why they regularly denounce speculators and demand control over rating agencies. But there is little chancellors, presidents and premiers can do about it.
...The obvious lesson has not been learnt. There is ambiguity about what part of the liabilities of banks should be underwritten by governments, with the practical consequence that governments often stand behind all of them. The ambiguity over the role of the European Central Bank prompts a question over whether eurozone Member States are jointly and severally responsible for each other’s debts. It is clear what the answer to this question must be, since there is only one answer that could, or should, be acceptable to taxpayers or the constitutional court of Germany or is consistent with continued fiscal autonomy for Member States.
European politicians prefer not to consider that question. The most dangerous form of debt-related ambiguity would allow some European institution to leverage its balance sheet, borrowing from private markets the money that Member States would refuse to provide if they were asked directly.
Whatever the formal status of these liabilities, in reality they would be underwritten by the credit of national governments.
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