Euroland's original sin

Papadimitriou and Wray's 2012 diagnosis that the euro's design left member-state debt exposed to default risk, because no institution was committed to standing behind it. It described the euro before the ECB began acting as dealer of last resort.

Written at the height of the crisis, the original-sin argument held that the eurozone had separated fiscal responsibility, which stayed national, from the currency, which was run jointly, and had given no one the job of preventing a run on government bonds. The sovereign-debt crises in Greece, Ireland, Portugal, Spain and Cyprus fitted that account: yields rose because markets doubted anyone would stand behind the bonds, not because those governments had spent recklessly.

What changed was the ECB's behaviour, not the treaties. Since 2012 it has shown it can and will buy member-state bonds when needed, and the 2020 pandemic, when deficits and debts rose sharply while yields stayed low, confirmed it. The original sin is best read as a description of a backstop that was missing, which the ECB has since provided in practice but not yet made permanent and unconditional.