EMU fiscal architecture

Eurozone members share one currency, run monetary policy through the ECB and keep fiscal policy at home. Nothing is inherently wrong with the euro; its two faults, an ECB backstop that has been conditional and a fiscal framework aimed at the wrong target, can be fixed within the current architecture.

The euro is a common currency: within the euro area there is no exchange rate and no settlement between central banks of the kind needed when money moves between currencies. For each member it is a domestic currency, shared with the others, not a foreign one. Early critics compared eurozone governments to US states, which cannot create the dollar. Events turned out differently: once the ECB showed it would buy member-state bonds, those governments looked much more like a national government with a self-imposed borrowing limit.

Economists still debate whether 'currency issuer' describes the central bank, the treasury or both. On the view that the US federal government is a currency issuer, France or Spain is one too, as long as the ECB acts as dealer of last resort. When a member state cannot pay, it is because of supranational rules the United States does not have.

That leaves two things to fix, both possible inside today's institutions: an ECB that stands behind every member's bonds permanently and without policy conditions, and a fiscal framework that targets full employment and price stability. Neither depends on creating a United States of Europe.

Didn't Greece prove that member states can go bust? It proved that a member state can be pushed into crisis when the ECB declines to stand behind its bonds. Once the ECB did act, from 2012 and again in 2020, yields fell regardless of debt levels.