CurrencyGlobe and Mail Editorial
Friday, Dec. 10, 2010

Germany’s rejection of a proposal for “eurobonds” may doom it to picking up the largest share of the bill for future bailouts of other European governments – or else to membership in a considerably smaller euro zone.

Currencies cannot practically be shared by fully sovereign countries – unless a weaker country simply gives up on having a currency of its own, and uses foreign money over which it has no control. The euro zone will have to accept a dose of federalism – or expel some of its members.

In the 1930s, a few Canadian provinces were insolvent, but Canada and the Canadian dollar survived, because the federal government remained solvent and its debts were the debts of the whole nation. It still had a respectable credit rating, and could in due course help rebuild the borrowing ability of the shakier provinces.

The euro zone needs something analogous to Canadian federalism; otherwise, it should retreat into, say, a group of the original six members of what is now the European Union – but maybe without Italy.

Something more constructive remains feasible. There could be a collective liability for some defined portion of the borrowing of the each member of the zone – that is, not more than each member could be expected to afford to repay. Germany and other rich countries would be better off taking on such moderate risks than finding themselves chronically called upon to pay up in a crisis. Then the less financially stable countries could be left to default on any additional, separate debts they had taken on.

None of this is a quick fix for the present crises, but the euro zone has to move forward or back. Angela Merkel, the German Chancellor, is shortsighted and inconsistent in opposing the eurobond concept while maintaining that the euro itself is irreversible. She, or one of her successors, will have to choose.

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