The Incomplete Currency

Chapter 10Mutualisation of the Public Debt and Fiscal Transfers

In the previous chapters we studied in detail the interventions put in place by the European institutions and by national governments in order to fight the Eurozone debt crisis, improve public finances, support the banking systems and contrast the credit crunch. The extreme case of Spain (see Figures 5.22 and 5.23, § 5.2) has highlighted how rescues of this kind are by no means free of costs, although by analysing the timeline of the crisis and the interventions put in place it is possible to recognise the tendency to use the mechanism that appears to be less expensive in the short term. For example, the EFSF did not require (unlike the ESM) any direct cash outlay by the Member States but only the establishment of a network of guarantees.

The fact that a solution may seem cheap in the short term obviously does not imply that it remains less expensive over time. The EFSF, despite its interesting financial engineering and the good results in the management of the crisis of small peripheral countries (Ireland and Portugal), has not defused the mechanisms feeding the process of divergence, which has finally spread to Spain and Italy. This has required the creation of the stronger (and more expensive) ESM, not to mention the indirect costs at the expense of the economies of the countries in difficulty in terms of decline of the GDP, rise of the unemployment and loss of tax revenue.

10.1 The Mutualisation of the Public ...