1. The origins and nature of the current crisis
The crisis of the eurozone is frequently seen as a crisis of excessive public spending and debt. Governments have been spending too much, therefore markets have lost confidence in these governments and they are demanding higher returns e.g. on bonds from these governments. Similarly current debates often rely on the logics of the Stability and Growth Pact (SGP) – if not in the short-run then at least in the medium- to long-run perspective. The logics of the SGP are seen as adequate rules of economic governance: if only the rules could be respected we would not have ended up in this mess. Accordingly the enforcement mechanisms of the SGP should be reinforced by sanctions or other mechanisms in order to maintain or create budgetary discipline among national governments.

However, the available data do not confirm the idea of excessive public spending as being the cause of the crisis. Public debt has grown in Greece in the years preceding the current crisis, but this is not the general case of the eurozone. In countries such as Ireland and Spain – currently being victims of the crisis – public debt was at modest levels and falling in relative terms before the crisis and its recent explosion is caused by and follows from the financial crisis and not vice versa. In the eurozone as a whole the share of public debt in GDP was falling until 2007, i.e. in the period leading to the crisis. After 2008 the share of public debt has grown considerably everywhere – private debt has been “nationalized”. However, private and external debt had grown much more significantly than public debt in the years before 2008 – these developments are much more important than the growth of public debt for a proper understanding of the current crisis.

The economic interdependencies between the member-states of the eurozone are characterized by an asymmetry between the industrial core of Europe, essentially Germany, and other European states of which some can be characterized as peripheral while other are industrialized economies whose productive basis remain dependent on the German core. Simplifying matter we may observe the persistence of substantial German balance-of-payments‟ surpluses towards most other eurozone states.

Divergences between eurozone members in terms of competitive positions have been persistent and/or growing over the period 1998-2008. From 2002 the German economy has realized a significant current account surplus – reaching 8% of GDP in 2007. These surpluses derive from interactions with other EU-member states who are thus to be found in a deficit position towards Germany.

Structural German surpluses, export-driven growth, a falling domestic wage share and/or low domestic demand implies the existence of a balance-of-payments constraint on Germany‟s trading partners. Such a constraint can be met either by low growth among the trading partners in order to limit deficits or by increased debts – private and/or public. Tensions are likely to emanate from such a set-up. During the last decade they have probably been “smoothened” by e.g. strong US growth and current account deficits allowing European exports to the US and the overall growth of the eurozone member states.

However, once the comparatively favourable context changed these tensions could no more be contained. The global financial crisis initiated in the US was a crisis originating from the activities of private finance and a subsequent accumulation of private debt linked to the housing sector and an increasingly uneven distribution of income. For a variety of reasons (banking interconnectedness, lack of adequate EU crisis defense mechanisms, lack of a common banking supervision, the presence of significance divergences in terms of competitiveness and debt positions etc.) the American crisis rapidly turned into a European – but not to a global crisis. The common currency was supposed to insulate the European economies against external instabilities and indeed the creation of the euro has blocked currency speculation among the European currencies. However, the co-existence of footloose finance, the explosion of public debt subsequent to the financial crisis, and continued divergences of economic performances implied that speculative capital movements were soon to be directed against government debts and bonds.

The relative size of the deficit and debt problems encountered by one or a few states within the eurozone was modest e.g. compared to the aggregate size of the European economy. The balance problems of the eurozone as an entity are insignificant. These problems could have been handled by the EU, had the EU been instrumentally, institutionally, ideologically and politically prepared for such developments. Why did a relatively small albeit problematic case (Greece) become such a challenge for the EU? And why has the Greek case been allowed to “contaminate” other cases – whose points of departure did not resemble Greece? The brief reply is that the whole issue has been handled in such a clumsy way – imbalances have been allowed to develop and spread and furthermore they have possibly even been aggravated by political steps taken by EU-institutions and/or member states. However, a more extended reply could be formulated in terms of respectively issues of governance and issues of doctrine.

2. Issues of governance – issues of doctrine
The informal and rather loose economic governance structure of the euro-zone can be characterized by the interplay between a set of formal rules related to public deficits and debts (the SGP), a particular form of independent central banking characterized by the exclusive focus on controlling consumer price inflation with no attention to asset price inflation and financial stability, and a certain regulatory role to be played by private actors, namely private capital owners as well as private credit rating agencies.

The eurozone crisis came as a surprise to the policy-making apparatuses of the EU. No preparatory steps had been taken and no instruments were readily available to counter instabilities. Thus the EU policy-making institutions have had to improvise solutions in order to face the challenges rapidly developing after the spread of the sub-prime crisis. Most of these solutions were not faithful to the rules and the spirit of the EU-treaties. It started with the ECB acknowledging in mid/late 2007 that it had not one and only one task to care about (price stability) but two clearly different tasks: price stability and the maintenance of financial stability by providing liquidity if need be. A “normal” central bank should see the provision of liquidity as one of its main tasks – who else should care about the supply of liquidity? – but the ECB is hardly a “normal” central bank.

The improvisations continued by the different sorts of bailing-out – hardly the logical consequence of the Maastricht Treaty and its underlying philosophy – and the set-up of the European Financial Stability Facility (the EFSF). And recently we have seen the ECB engaging itself firstly in buying bonds from e.g. Portugal, Spain and Italy and secondly in supplying cheap credits to banks within the eurozone (the so-called LTRO).

The crisis management still relies on the logics of the SGP. This point raises at least two issues: the legitimacy and political implications of an increasingly severe form of supranational control of national fiscal policies, and secondly the adequacy of the economic logics of the SGP. We shall stick to the second point here.

The SGP constitutes an inadequate reply to a very real issue, namely the presence of externalities among the eurozone member states: economic policy decisions in one member state may have a non-desirable impact on other states. However, by its exclusive focus on public spending and debt it relies on a fallacious and biased assumption: that only the activities of the public sector may produce negative spill-overs. Correspondingly the SGP implies an emphasis on the need for reducing public spending and debt before stimulating demand and independently of the situation of different countries. Thus e.g. Greece, Spain and Germany should follow the same policies independently of their external balance position. This leaves the question of the generation of effective demand in a situation of deflationary tendencies open. As noted above the idea that the current crises is caused by excessive public debt cannot be justified empirically and a reinforced SGP would therefore presumably not have prevented the current crisis – recalling the fact the countries like Spain and Ireland were rather faithful followers of the SGP rules and that the share of public debt in GDP in the euro-zone generally speaking were falling or stable before the financial crisis. An economically meaningful SGP should start by acknowledging the interdependencies between public, private and external balances, and thus for instance formulate rules as to the size of external surpluses: if there are to be limits on public deficits why not also limits on external surpluses?

The current mechanisms of governance lack what is usually termed a lender of last resort (LLR). In a national context the central bank assumes the task of being the LLR. However, the need for a LLR has never been formulated in an EMU context and improvised action has therefore dominated. Up to a point the ECB has reluctantly accepted the task of providing liquidity, but the rather chaotic processes of the last few years clearly demonstrate the need for a credible provider of liquidity and credits. The ECB does not wish to play this role and still sees its main task as being that of providing price stability. The EFSF and its follower (the European Stability Mechanism) cannot play the role of a LLR in a longer-term perspective. The ECB has seemingly been more inclined to provide liquidity to indebted private banks than to indebted states, thus perhaps more willing to function as a LLR for private than for sovereign debtors. Why? Problems of moral hazard need not be less serious for private than for sovereign debtors, and private debtors need not be more solid than sovereign debtors; perhaps for reasons of ideology?

3. The Euro-Pact: Solving the wrong crisis
This form of governance – and its underlying ideological framework – is what is currently in a deep crisis. The consequences are severe: deficit member-states have been forced to take expensive loans on market conditions thus encouraging contagion and spreading of instability and the disciplinary framework of supranational policy-making is reinforced. Furthermore the lack of an adequate framework of economic governance and of an effective structure of decision-making has strengthened the intergovernmental structure of the EU decision-making – the “federal” bodies of the EU and even most member state governments have been marginalized in the policy-making processes engineered by the Merkozy duo – potentially aggravating the already existing problems of EU democratic legitimacy.

If we are to be very optimistic on behalf of the euro-zone we could hope for the following outcomes of the Euro-Pact: it may calm the financial market operators and thus ease the pressure on heavily indebted countries, it may facilitate a more interventionist attitude from the ECB as a sort of a quid pro quo, and governments – if they so wish – may be able to find sufficiently many loopholes in the Euro-Pact to circumvent its otherwise rather strictly looking set-up.

But even if such optimism holds true the Euro-Pact does not address any of the basic structural problems currently facing the euro-zone (structural imbalances between member countries, accumulated private and external debts, huge investment deficits etc.). Thus neither a lasting solution to the sovereign debt crisis of an increasing number of eurozone states nor a revitalization of economic growth within the EU-area is likely to result from it. Political and social tensions as well as an improvised search for new solutions to the crisis are likely to follow as a consequence.

In the “rescue” packages of the last two years we have been able to observe a fact that should surprise nobody: the later you act the more costly and difficult it becomes. Within a not too distant future we may witness the same story again – if and when the Euro-Pact turns out to be incapable of stopping the debt crises of European debtors.

Some actors are likely to realize (or to believe) that things are not going to work. This will include market actors and perhaps increasingly also other member states. Both may realize the feeble or inadequate commitment of the EU and its leading member states to act or the lack of legitimacy of actions taken. Thus it is already possible to note a process in which Germany and other creditor countries are increasingly dissatisfied and/or frustrated with Greece and its seemingly insufficient implementation of necessary structural reforms. Simultaneously the Greeks are increasingly frustrated by the fact that their efforts – seemingly imposed by their wealthy Northern partners – are seemingly in vain and at the same time socially and economically costly. While such a game indeed involves a mutually reinforcing creating of nasty national stereotypes, it also reflects the fact that the economic logic underlying current austerity is problematic. And the inadequacy of austerity policies and the development of national stereotypes may be linked: why should the Northern creditor countries continue the supporting of countries likely to fail in any case, and why should Southern debtor countries continue on the path of austerity if this is believed to imply externally imposed suffering without the prospective of a subsequent bettering?

The worsening of the crisis – which is likely to continue within the foreseeable future – may shift the balances of power between different positions and interests. Hopes for a more creative set of policies could perhaps derive from political change in the major European countries. Otherwise prospects of a reinforcement of nationalist solutions linked to a gradual splitting-up of the Euro-zone appear as an increasingly likely outcome of the present impasse.