Crises: The European Monetary Union Needs a Government Banker

This chapter was one of the very first papers to identify that the institutional construction of the euro left member country national governments at the mercy of bond markets and seriously impeded their ability to conduct deficit-financed fiscal stabilization policy. It then argued monetary union stability requires a government banker that manages the bond market, and it offered a proposal for stabilizing the euro that complies with the "no country bail-out" clause. The euro solved Europe's problem of exchange rate speculation by creating a unified currency managed by a single central bank, but in doing so it replaced the exchange rate speculation problem with bond market speculation. Remedying that requires a central bank which acts as government banker and maintains bond interest rates at sustainable levels. That can be accomplished via a European Public Finance Authority (EPFA) which issues public debt that the European Central Bank (ECB) is allowed to trade. The debate over the euro's financial architecture also has significant political implications. The current neoliberal inspired architecture imposes a separation between the central bank and public finances, which puts governments under continuous financial pressures. That will make it difficult to maintain the European social democratic welfare state. This gives an additional political reason for reforming the euro and creating an EPFA and supplements the economic case for reform.