New Stable Doors Installed

European monetary union did not happen overnight, indeed, modern initiatives for a single European currency can be traced back to 1929. A driving force behind the eventual creation of the European Union was as a trading bloc where barriers to trade and tariffs were done away with. Extension of this idea to a single currency, which facilitates trade, was always a logical step which is why, in the fullness of time, the Euro will be adopted by all EU member states (including the UK!).

It was always recognised that for the Euro to work as a single currency for the Eurozone membership that the economies of the member nations had to be broadly aligned. This was to have been achieved by the setting of convergence criteria which had to be met prior to membership and a requirement to keep current account deficits below a set level for members.

The origins of the European sovereign debt crisis – which is really simply a crisis of confidence – can be traced back to the fact that Greece fudged the figures to join the Eurozone before it had truly met convergence. The revelation of Greece’s duplicity came in the midst of the global financial crisis and sparked its own firestorm.

Yesterday, the EU finance ministers announced the formal launch of the European Stability Mechanism (ESM) which should attain its full operational lending capacity of €500 billion by 2014. ESM will run in parallel and then replace the European Financial Stability Fund and constitutes a new European Union Agency.

ESM is designed to give the Eurozone a “robust and permanent firewall,” according to Olli Rehn, EU economic and monetary affairs commissioner. There have been concerns that the ESM lacks the necessary financial depth to deal with a Spanish and Italian bailout, but the ECB policy to openly back the sovereign bonds of (bailout recipient) nations finding their borrowing costs unrealistically high has calmed market jitters. If borrowing costs remain reasonable, no new demands would be likely to be made on ESM which, in that sense, amounts to a new security blanket.

If the fears of the Eurozone sovereign debt crisis and the spectre of further bailouts are receding, then the Euro is likely to appreciate. Debt worries could then reasonably pass to the public debt in nations such as the USA, Japan and Britain – they are unlikely to go away. Politicians ought to be called to account for putting so much of national spending on credit since the cost of managing this debt has long since become utterly unreasonable.