Beijing Law Review, 2012, 3, 81-91
http://dx.doi.org/10.4236/blr.2012.33011 Published Online September 2012 (http://www.SciRP.org/journal/blr) 81
The Euro Crisis. What Went Wrong with the Single
European Currency?
Antonio Goucha Soares1,2
1ISEG—School of Economics and Management, Technical University of Lisbon, Lisbon, Portugal; 2GHES Research Center, Lisbon,
Portugal.
Received June 14th, 2012; revised July 15th, 2012; accepted July 26th, 2012
ABSTRACT
This article delivers a brief contribution to the d ebate about the Euro crisis. With that purp ose it lists the objectives, in-
terests and power relations underlined by the main political actors by the time of th e introduction of monetary coop era-
tion within the field of European construction. It begins with a reference to the first experiments of monetary coopera-
tion between European countries—with the so-called European Snake, and later the European Monetary System—
which were intended to protect the common market from the turmoil caused by the collapse of the international mone-
tary system. It also addresses the adoption of the economic and monetary union by the Treaty of Maastricht, the creation
of the single currency and the first attempt to control fiscal policy with the Stability and Growth Pact. Then it concen-
trates on the crisis affecting the Eurozone, initiated with the Greek sovereign debt crisis. It starts with a reference to
core Euro countries early reaction to the crisis, to continue with the measures adopted to support the Euro system, be-
fore discussing what would be the much needed firewalls that could deter financial attacks. The final sections are de-
voted to the Fiscal Treaty, and to the impact of crisis management on the European Union balance of powers.
Keywords: Europea n Union; Monetary I nt e grat i o n; Si ngl e Currency; Euro; Euro Crisis; Fiscal Treaty;
EU Balance of Powers
1. Introduction
The European Union has witnessed over the past two
years the most serious crisis of its entire life. Although
the word “crisis” is part of the genetic code of European
construction, in the sense that were few periods over the
past six decades that have not faced any form of crisis in
the context of European integration, the fact is that the
level of current events overcame all the worries and sus-
picions of the previous phases, to the point that some of
the major European leaders admitted the break of old
taboos, such as threatening a Member State to leave the
Union.
On the basis of this situation is the crisis of the Euro . It
should be remembered that the Economic and Monetary
Union was until recently widely seen as one of the great-
est achievements of European integration. By the time of
its creation the European Commission considered that it
represented the utmost form of economic integration.
France, one of the partners of the so-called European
integration engin e, saw in the monetary union the way of
countering the growing power that Germany would exert
over the process of European construction. In turn, Ger-
man Chancellor Kohl considered—by the time of na-
tional reunification—that the adoption of the single cur-
rency was a matter of war and peace among European
countries for the coming century [1].
Indeed, the major goal of European integration was to
achieve a lasting peace within Europe, putting an end to
the recurrent acrimony between the major continental
powers. Since the very beginning the aim of European
integration was to favor a harmonious atmosphere for the
development of Franco-German relations. Thus, in the
aftermath of the Second World War the European Eco-
nomic Communities were the agreed device to overcome
the political dichotomy framed by Thomas Mann, in fa-
vor of a European Germany.
This article intends to offer a brief contribution to the
debate about the ongoing Euro crisis. With that purpose
it lists the objectives, interests and power relations un-
derlined by the main political actors by the time of the
introduction of monetary cooperation within the field of
European integration. It begins with a reference to the
first experiments of monetary cooperation between Euro-
pean countries—with the so-called European Snake, and
later the European Monetary System—which were in-
tended to protect the common market from the turmoil

The Euro Crisis. What Went Wrong with the Single European Currency? 82
caused by th e collapse of the internatio nal monetary sys-
tem. It also addresses the establishment of the economic
and monetary union by the Treaty of Maastricht, the
creation of the single currency and the first attempt to
control fiscal policy with the Stability and Growth Pact.
The article then concentrates on the current crisis af-
fecting the Eurozone, initiated with the Greek sovereign
debt crisis. It starts with a reference to core Euro coun-
tries early reaction to the crisis, to continue with the
measures adopted to support the Euro system, before dis-
cussing what would be the much needed firewalls that
could deter financial attacks against the single currency.
The final sections of the article are devoted to the latest
Treaty adopted in the framework of monetary integration,
the so-called Fiscal Treaty, and to the impact of crisis
management on the whole European Union balance of
powers.
2. Monetary Cooperation
The advent of monetary cooperation within the scope of
European construction was a consequence of exchange
rate volatility caus ed by the decline of the Bretton Woods
system occurred since the late 1960s. The main concern
of the Member States by adding a monetary dimension to
European integration was to protect the common market
from exchange rate instability of international financial
markets, as well as to safeguard the financing of the
common agricultural policy prices from the turmoil that
could affect the exchange rate of different national cur-
rencies.
In the perspective of the European institutions, par-
ticularly the Commission, monetary integration would
also represent the peak of a true European Economic
Community, which was an additional reason to seize the
opportunity created by the decomposition of the interna-
tional monetary system and to relaunch the dynamics of
European integration [2]. For these reasons, monetary
integration appeared as a new strategic target that would
serve both the interests of the Member States to ensure
exchange rate stability, and the ideological purposes of
European integration that inspired the action of the
European Community institutions.
It should be remembered, however, that monetary pol-
icy remained by that time an exclusive national compe-
tence, and that the main concerns of the different Mem-
ber States regarding this area tended to diverge. In fact,
Germany intended primarily to curb the gradual appre-
ciation of the Deutsch mark, which was increasingly seen
as a strong currency in the international system, in order
to maintain the competitiveness of its exports. Identical
concerns guided the position of other countries with a
strong currency—which had surpluses in its trade bal-
ance—such as the Netherlands [3].
In turn, the so-called weak currency countries—with
trade deficits—such as France, Belgium, or even the UK,
saw monetary cooperation as a key instrument for the
success of its domestic policies against inflation. For
these reasons, the division that initially emerged within
Western Europe opposed this latter group of countries,
which sought monetary cooperation-being called “mone-
tarists”—against the strong currency states, which argued
that monetary cooperation should be preceded by the
harmonization of the economic policies of the Member
States—for this reason referred as “economists” [2].
In the match between “economists” and “monetarists”
countries (a term that had nothing to do with the eco-
nomic theory of the same designation), the former argued
that economic convergence must precede monetary inte-
gration, assuming the asymmetry of this process in the
sense that the costs of exchange rate stabilization should
be on countries with weak currencies, which should first
improve economic data such as the level of inflation,
interest rates and current accounts balance.
Instead, “monetarists” countries, supported by the Com-
mission, felt that the costs of stabilizing ex ch ange rates at
the European level should be funded by countries with
strong currencies, or that there should be at least some
form of symmetry in the accommodation of those costs.
In their opinion, surpluses countries should face a choice
between financing the deficits of with weak currency
countries, or accept higher inflation rates [1].
Thus, Germany argued since the very beginning of the
process of monetary cooperation that the macroeconomic
adjustment costs should be supported by weak currency
countries, which should first reach the sustainability of
its public finances and improve the competitiveness of
their economies. It should be noted that since 1965 the
German authorities expressed their concern that if the
costs of economic adjustment wer e to stay on strong cur-
rency countries, this could generate a risk of moral haz-
ard, passing a wrong message to weak currency countries
that they could maintain high budget deficits, which
would favor an indirect increase of inflation in Germany
[3].
The divide between the two groups of countries was
somewhat mitigated by the ad option of so-called Werner
Report, in 1970, on the economic and monetary union.
This document stated a new goal to be accomplished
within ten years, passing through three distinct phases.
The transition to the final phase would determine the
irrevocable fixing of exchange rates between Member
States, and the conferral of powers on monetary policy to
the Union. The differences between Germany and France
were the subject of a fragile compromise, which provided
some parallelism between coordination of States eco-
nomic policy and monetary integration [1].
However, the Werner Report suffered from the rapid

The Euro Crisis. What Went Wrong with the Single European Currency? 83
deterioration of the international situation, due to the
declaration of inconvertibility of the dollar vis-à-vis the
ounce of gold. In an attempt to preserve exchange rate
stability in Western Europe it was carried out an agree-
ment on exchange rates in 1972, which became known as
the Monetary Snake, aiming to contain the fluctuation of
the national currencies of the contracting parties in a
band of 2.25 % [2].
This agreement, which also included the participation
of the Scandinavian countries and the United Kingdom,
faced some inconsistency regarding its Member States,
due to several entries and exits of weak currency coun-
tries. Over time, the so-called Monetary Snake became a
sort of enlarged area of the Deutsch mark, composed by
countries aligned with the Bundesbank’s monetary policy,
a process that even saw France compelled to abandon the
agreement in 1976, after some discontinuity in its im-
plementation.
Note that the agreement on the Monetary Snake al-
lowed Germany to curb the appreciation of its currency
—by the time the Deutsch mark had already become a
re- serve currency due to the international monetary sys-
tem breakdown—without having undergone any con-
straints from third countries in running its monetary pol-
icy [1].
The European Monetary System
A further attempt to overcome the divide between the
two groups of countries in the area of monetary coopera-
tion came from Roy Jenkins, in 1977. The President of
the European Commission launched the idea of creating
a European Monetary System, which would be devel-
oped by German Chancellor Schmidt, in line with French
President Giscard d’Estaing. The political agreement for
the creation of the new system was concluded in 1979
and achieved a Franco-German settle ment concern ing the
main goal of defending exchan ge rate stability within the
European Community [4].
The European Monetary System was based on the
mechanism of the Monetary Snake, which aimed to pro-
mote exchange rate stability. The EMS reintroduced a
limit to the fluctuation of national currencies, limited by
a band of maximum variation of 2.25%, with the excep-
tion of the Italian lira that could float up to 6%. The nov-
elty of the mechanism was the introduction of a new
currency—the so-called European Currency Unit (ECU)
—which established a benchmark for each national cur-
rency [2].
It is worth remembering that Helmut Schmidt led per-
sonally the process that led to the agreement on the
European Monetary System to prevent leaks to the tech-
nocratic circles, notably the national central banks, fear-
ing eventual obstacles that could be raised by the Bun-
desbank [3]. In other words, although monetary coopera-
tion was an area characterized by the strong technical
nature of its contents, Schmidt sought to affirm the po-
litical aim of the system.
In political terms, the European Monetary System was
the first initiative of German leadership within the proc-
ess of European integration. Until then, the European
political agenda was dominated by France or at spaces at
the initiative of the Community institutions, particularly
the Commission. The fact that they took the area of
monetary cooperation for a premier on European political
leadership is symptomatic of the importance that this
area represented for Germany.
Indeed, the aim of exchange rate stability t hat presided
over the European Monetary System assumed the con-
vergence of the economies of the contracting countries,
especially in the effort to combat inflation, which was a
fundamental priority for the German government. Ger-
many also wanted to protect against the negative effects
of international monetary volatility, in particular the ap-
preciation of the Deutsch mark as a reserve currency.
France and Italy saw the participation in the system as an
instrument for the implementation of its domestic poli-
cies to fight inflation [1].
During the negotiations for the creation of the Euro-
pean Monetary System the discussions about who should
bear the costs of adjustment in times of crisis reemerged,
with Germany arguing that it should be supported by
weak currency countries, and France, Belgium and Italy
aiming to introduce a less asymmetric model for the dis-
tribution of those costs, which would implied the creation
of mechanisms that allow the financing of deficit coun-
tries.
The idea of creating a European Monetary Fund,
which appeared in the first Schmidt draft, was replaced
by a monetary cooperation fund that could provide short-
term loans to countries with liquidity problems. Howev er,
there were rare cases of the stability mechanism action,
to the extent that international markets provided funding
to needed countries without the constraints arising from
the conditionality of the monetary cooperation fund [3].
Overall, it can be said that the European Monetary
System helped to achieve a zone of monetary stability
among its contracting States for more than a decade, with
stabilization of exchange rates and inflation [1]. However,
during the first years of its implementation the system
went through some tensions due to currency devaluations
of the French franc in the early ages of the Mitterrand
presidency.
Indeed, the French franc exchange rate readjustments
in the first half of the 1980s were made only after lengthy
negotiations with the German government, which in turn
demanded France to increase taxation and reduce public
expenditure, a set of duties that led some commentators

The Euro Crisis. What Went Wrong with the Single European Currency? 84
to ponder whether the European Monetary System could
be viewed as a light version of the International Mone-
tary Fund [3].
3. The Economic and Monetary Union
The aim of an economic and monetary union was rein-
troduced on the European agenda by the Commission
President Delors. Although monetary union had been its
initial preference in 1985, Jacques Delors—who had
been minister of finance during the first governments of
the Mitterrand presidency—soon realized that he could
not obtain the consensus of all Member States to achieve
such a purpose.
Hence, he began by gathering the support of the Mem-
ber States for the internal market program. After the
coming into force of the Single European Act, Delors
returned to its idea of monetary integration, presenting
the goal of an economic and monetary union as the cor-
ollary of the single market, to the extent that this implied
the complete liberalization of capital movemen ts [5].
Although he got the so-called Delors Report on the
Economic and Monetary Union to be approved by the
European Council in 1989—a paper prepared by a work-
ing group composed by the governors of national central
banks—its achievement remained doubtful due to the
British intransigence, and above all the very hostility to
the idea of a single currency raised within Germany, in
particular, the Bundesbank. In fact, Germany was the
main beneficiary of exchange rate stability provided by
the European Monetary System, and the road towards a
monetary union would imply the loss of sovereignty in
the area of monetary policy.
A vital issue in the decision to establish an economic
and monetary union was the fall of the Berlin Wall. In-
deed, the sudden evolution of the process of German
reunification—presented to the other European Commu-
nity Member States as a fait accompli, by Chancellor
Kohl—provided a new interest to the creation of an eco-
nomic and monetary union, particularly by France, which
had strong worries about the consequences of German
reunification in the European balance of powers.
For these reasons, France required that Germany
should give a clear signal about the sound nature of its
European commitments. Therefore, Ger many had to come
to terms and accept the move for an economic and
monetary union, in line with the Delors Report [5].
Indeed, apart from involving the new Germany in a
lasting way with the European institutions, France also
wanted German y to suffer a real loss in an area in which
it had been able to assert its leadership within Europe:
monetary policy. So the opportunity to create an eco-
nomic and monetary union, endowed with a single cur-
rency, was the most appropriate tool to ask Germany to
renounce to the symbol of its economic hegemony across
Europe, the Deutsch mark. As mentioned above, Ger-
many had ruled over European monetary policy through-
out the previous decad es, con trolling th e Monetary Snak e,
and the European Monetary System.
Germany raised some conditions to accept the call for
an intergovernmental conference to establish an eco-
nomic and monetary union. On the one hand, it asked
that the economic and monetary union should be com-
pleted with an evolution to a political un ion. On the oth er
hand, it wanted to control the adoption of the technical
criteria that would pave the way for the creation of a sin-
gle currency.
3.1. The Single European Currency
The intergovernmental conference on the European po-
litical union delivered results that fell short of the expec-
tations created when it was convened in 1990. The Euro -
pean Union established by the Maastricht Treaty did not
embody the goals of political integration that inspired
some Europe an leaders such as Chanc ellor Kohl .
The minimalist co ntent of the Europ ean political union
was reflected by the intergovernmental conference on the
economic and monetary union. In fact, the conference
mainly discussed a set of technical issues—the major
guidelines were already set by the Delors Report—with a
background opposition between the German positions,
and those presented by the Commission and France.
Overall, Germany was able to see their claims repro-
duced in the final negotiations draft, from the start to be
the country with the biggest lost du e to the creation of the
single currency, so it would be one that would face more
problems at the domestic level to approve the agreement
on the economic and monetary union.
Hence, regarding the major issues discussed during the
negotiations on the economic and monetary union Ger-
many obtained the acceptance of their positions on the
whole core of nuclear questions, namely the convergence
criteria, the European Central Bank’s independence, the
scope of application of so-called opting-out, the schedule
for the transitional period with the possibility of a two-
tier system, the provisional nature of the entities created
during the second phase, the headquarters of the central
bank, the designation of the single currency, and the ban
on bailing-out highly indebted countries [3].
The only issue that did not deserve immediate accep-
tance of the German positions during the Maastricht ne-
gotiations concerned the instruments of control and sanc-
tion of countries with excessive budget deficits, which
were later incorporated by the Stability and Growth Pact.
It is important to note that the core issues discussed
during the intergovernmental conference concerned the
monetary union. Indeed, the Maastricht Treaty kept eco-

The Euro Crisis. What Went Wrong with the Single European Currency? 85
nomic policy in the field of nation al competence. Hence,
it created a structural imbalance in the working of the
economic and monetary union: monetary policy became
an exclusive competence of the European Union, ac-
cording to article 3 of the Treaty on the Functioning of
the European Union; economic policy remained within
the jurisdiction of the Member States, according to article
5(2) of the Treaty on the European Union.1
Indeed, the Maastricht Treaty established a centralized
monetary policy, whose implementation was conferred to
a full independent institution , the European Central Bank.
However, the monetary union was to be built within a
truly decentralized political system, in so far as it still
depends on the unanimous agreement of the Member
States. That is to say that the Euro should operate withou t
a strong political power in the background—despite the
question of statehood—which could define economic
guidelines to support the running of monetary policy [5].
Similarly, the monetary union was not complemented
by a qualitative conferral of powers that would allow, for
example, supporting countries that could face some li-
quidity problems. Rath er, the Maastricht Treaty enacted a
ban on the bailout of the Member States, as well as the
interdiction of financial assistance from the European
Central Bank to national governments. Hence, the Eco-
nomic and Monetary Union kept the asymmetric nature
underlying monetary cooperation agreements concluded
in the previous decades, compelling deficit countries to
support the costs of adjustment in times of economic
crisis or financial turmoil.
3.2. The Stability and Growth Pact
The Amsterdam Treaty, which had been drafted with the
purpose of comple ting the political proc ess initiated with
the Maastricht Treaty, gave some impetus to the political
dimension of the European Union. However, as far as the
Economic and Monetary Union was concerned, its con-
tribution was restricted to the Stability and Growth Pact,
which fulfilled a German claim that had not been held in
Maastricht. Thus, the conferral of budgetary powers to
the European Union was confined to a system of central-
ized control of fiscal policy to deal with profligate
Member States, through a set of mechanisms for moni-
toring and sanctioning Euro countries with large public
deficits. Rather, the monetary union remained devoid of
any budgetary instruments—as well as the financial re-
sources—that would allow playing a stabilizin g role.
The Stability and Growth Pact had its baptism of fire
in the early years of the new century. The difficulties that
the economies of some Euro countries then faced caused
a surge on government spending and a decrease on tax
payments. Consequently, France, Germany, Italy and
Portugal breached the 3% limit that the Pact stipulated
for the budget deficit, leading the Commission to op en an
excessive deficit procedure. Reiterated breaches of the
Stability Pact provisions by the three last-mentioned
Member States led the Commission to continue the pro-
cedure, and to submit to the Council a proposal to adopt
the sanctions laid down in the EU Regulation that im-
plemented the Stability Pact.
However, in late 2003 the Council refused the Com-
mission proposal and decided to give the countries con-
cerned more time to carry out fiscal adjustment, without
the constraint of the proposed fines. The Commission
appealed from the Council’s decision to the European
Court of Justice, which delivered a quite formalist judg-
ment, allowing national governments in practice to ig-
nore Commission recommendations.2 Thus, Member
States weakened the binding nature of the Stability Pact,
in deciding not to apply sanctions to the country that
shown more conviction in its creation [6].
4. The Euro Crisis
The outbreak of the sovereign debt crisis within the Eu-
rozone in 2010 exposed in a painful way the structural
weaknesses of the constitutional framework governing
the Economic and Monetary Union. First of all, the lack
of a true Euro pean political un ion that could favor effect-
tive solidarity between Member States. Furthermore, the
nonexistence of stability mechanisms to provide support
to countries that could face liquidity problems.
In fact, the Maastricht Treaty did not contain any pro-
visions to deal in case a Eurozone solven t country would
suffer speculative attacks affecting its financial liquidity.
Besides, the Euro countries face the difficulty of having
to issue its sovereign bonds in a currency which they do
not control, in the same way of a foreign currency. Thus,
the lack of an effective liquidity crisis management
mechanism within the Eurozone allow for the financial
markets to force the default of an Euro country through
speculative attacks on the issuance of government bonds,
turning a liquidity crisis in a problem that could put into
question the solven cy of the State itself [7].
The reason for this legal gap in the Maastricht Treaty
was the need to prevent moral hazard from profligate
Member States, forcing those governments to implement
the rules on fiscal discipline. In case a Euro country
would fail to access markets for financial needs, the al-
ternative would be to restructure its debt or, more likely,
to ask financial assistance from the International Mone-
tary Fund. One could not rule out the prospect of the Eu-
rozone countries to adopt, in extreme circumstances,
some device aimed at providing financial support [8].
Notwithstanding the weaknesses of the Monetary Un-
2Case C-27/04, Commission v. Council, 13 July 2004. 1See also arti cle 5(1) of Treaty on the Functioning of the European Union.

The Euro Crisis. What Went Wrong with the Single European Currency? 86
ion—resulting from the constraints surrounding its crea-
tion by the Maastricht Treaty and the subsequent evolu-
tion of the political process of the Union—it seems clear
that the leading Eurozone countries showed unusual dif-
ficulty to understand the deep nature of sovereign debt
crisis when it first arrived in 2010.
Essentially, the northern countries initially refused the
existence of a systemic crisis affecting the Monetary Un-
ion, whose vulnerab ilities were being exploited by finan-
cial markets, preferring to stress the individual responsi-
bility of the Member States that faced difficulties in is-
suing sovereign bonds, pointing out its excessive budget
deficits in breach of the Stability Pact.
Although the sovereign debt crisis of the Eurozone
countries has shown the risk of contagion to other coun-
tries from the beginning, and to the single currency as a
whole, the response of the major States preferred to point
out the ethical behavior of the countries. Thus, instead of
promoting the adoption of substantive measures that
could deter speculation against countries affected by a
lack of financial liquidity, Germany chose to emphasize
the need for those countries to take hard fiscal austerity
plans. If not so, according to the German perspective, the
Eurozone would consent the moral hazard caused by
fiscal laxity of the affected nations, allowing for a trans-
fer of the costs of stabilization between the Euro area
countries.
At the end of the day, Germany kept its position taken
since the beginning of the process of monetary coopera-
tion, concerning the issue of who should bear the costs of
adjustment in case of financial turmoil. Likewise, Ger-
many conserved the ethical foundation of its thesis, set
out in the 1960s, whereas the delivery of financial assis-
tance to States in difficulty could increase the danger of
moral hazard, which would result in a benefit to the
countries that breached the Stab ility Pact rules.
The German position would be praiseworthy for its
consistency in case the survival of th e Euro itself has not
been undermined by the contagion of the sovereign debt
crisis to a growing number of countries—a reality that
became clear throughout 2011—along with the failure of
the European Union to take adequate decisions and to
provide financial solutions to overcome the systemic crisis
that hit the single curren cy.
4.1. The Euro Answer
Nevertheless, it should be recognized that Germany made
some concessions in favor of the preservation of the Euro.
It should be remembered, indeed, that Germany has been
the main beneficiary of th e eliminatio n of ex- chan g e rate
risk provided by the Euro in intra-European trade, be-
yond the fact that the Monetary Union has favored its
exports to third countries by avoiding the overvaluation
of the European currency [9]. Those concessions were
tempered, however, with the request for stronger control
over Euro countries fiscal policy.
Thus, faced with the threat of a Greek default—and the
consequences that this could imply for the Euro area—
Germany accepted the creation of stability instruments
with a view to provide financial support to countries in
difficulty.3 Moreover, the contagion of th e so v ereign d ebt
crisis to other Euro countries led to the adoption of a
European bailout mechanism on a permanent basis—the
European Stability Mechanism4—a case that required a
revision of the Treaty on the Functioning of the European
Union to allow the institutionalization of this new device
of greater European responsibility.
However, the debate on the scope of financial means
allocated to affected countries revealed Germany’s doubts
to adopt the adequate measures that would allow a seri-
ous response against market speculation. Indeed, the
scarcity of financial resources allocated to the European
bailout funds was fueling fears among investors about
the effectiveness of those instruments in case a big Euro
country would face liquidity problems. Thus, if the con-
tagion of the sovereign debt crisis should extend to coun-
tries like Italy or Spain, the amount of money allocated to
the European bailout mechanisms would not suffice to
face the financial needs of these countries.
The lack of market trust in a Eu ropean response to the
sovereign debt crisis would increase with Chancellor
Merkel idea, presented in October 2010 after a meeting
with President Sarkozy, to invo lve private investors in an
eventual restructuring of the public debt of countries un-
der financial assistance programs. If by then the crisis of
sovereign debt was restrained to countries with high pub-
lic debt levels, the threat of private sector involvement
was the fuse for the spread of the sovereign debt crisis,
whose next target was Portugal, forced to ask for finan-
cial assistance in the spring of 2011. Indeed, the prospect
that private institutional investors could suffer major
losses with sovereign bonds of peripheral Eurozone
countries increased the risk of lending money to those
nations, with a consequent boost of interest rates in fi-
nancial markets.
In addition to traditional German political stances on
monetary policy—which argued that adjustment costs
3The European Financial Stability Facility (EFSF) is a special purpose
vehicle financed by members of the Eurozone to address the European
sovereign-de
b
t crisis. It was agreed on May 2010, and is authorized to
borrow up to €440 billion. There is also the European Financial
Stabilization Mechanism (EFSM), an emergency funding program
reliant upon funds raised on the financial markets and guaranteed by
theEuropean Commission. The Commission fund, backed by all 27
European Union members, is allowed to raise up to €60 billion. The
EFSM has been operational since May 2010. The EFSF and the EFSM
are both temp o rary bailout funds.
4The Treaty on the European Stability Mechanism was signed on Feb-
ruary 2012.

The Euro Crisis. What Went Wrong with the Single European Currency? 87
should be supported by deficit countries, as well as the
need to promote sustainability of public finances—there
was another issue that served as backdrop to the positions
taken by Merkel at the beginning of the Euro crisis: the
managing of the domestic electoral cycle. In fact, during
2011 several German Landers went through regional
elections, which made the Chancellor’s political agenda
to concentrate more on domestic issues than on Europ ean
politics. Faced with a public opinion that showed a
growing skepticism concerning the financial assistance
provided to Euro countries affected by the sovereign debt
crisis, and a tabloid press that questioned whether the
Germans should support the lifestyle and the profligate
vices of the Euro periphery, Merkel preferred to keep a
minimalist approach in the European front, not to under-
mine the coming domestic elections. For these reasons,
she began to resist the delivery of financial support to
countries in difficulty, and then to proceed with a policy
of underfunding the European bailout mechanisms, to
conclude with the idea o f involving private sector invest-
tors in an eventual Euro countries’ haircut. Hence, in the
making of the German position during the first year of
the Euro crisis, domestic preferences related to the elec-
toral cycle overlapped the Europe’s vital interest of a
rapid resolution of the problems affecting the monetary
union.
Alongside with the devices adopted for the financial
bailout of Euro countries, the crisis has also led the
European Union to strengthen mechanisms for fiscal dis-
cipline in the context of a legislative package—the six-
pack—aimed at improving the economic governance of
the single currency.5 Thus, there was an increase of
European supervision over fiscal policy, to allow a con-
sistent and timely implementation of measures. In addi-
tion, it was approved the so-called European semester,
which provides for a preliminary exam of the national
draft budgets guidelines by the European institutions, in
order to ensure its compliance with the stability p rog rams
presented by each Member State.
However, the core of the six-pack concerned the rein-
forcement of sanctions, predicting that countries that
refuse to fix limits for budget deficit and government
debt will be submitted to quasi automatic fines proposed
by the Commission, unless the Council decides to refuse
its application by qualified majority. Thus, with the six-
pack the Union sought to meet the objections raised by
those who believed that the sovereign debt crisis would
have resulted from lax fiscal policy in the countries of
the Euro periphery. Therefore, strengthening fiscal policy
centralized control.
Despite the wide range of measures taken since the
dawn of the sovereign debt crisis, and the permanent
alert that Europe has experienced since then, it is true
that this did not prevent the risk of contagion to other
Member States, namely, to the larger economies of Spain
and Italy. At the root of the risk of contagion seems to be
the inability of the Eurozone countries to agree on a
credible bailout program for the nations in difficulty. In
particular, to gather a larger amount of funding adequate
to cool fears of institutional investors, and create a
stronger firewall against financial speculators attacks.
4.2. Potential Euro Firewalls
In the absence of compelling bailout funds—endowed
with a deterrent firepower against speculative attacks to
the Eurozone—there have been put forward other alter-
natives to overcome the Euro crisis allowing for more
European responsibility. Among them the issue of Euro-
bonds by the European Union, or allowing the European
Central Bank to act as a lender of last resort within the
Euro area, were those considered that could put an end to
the turmoil threatening the survival of the single cur-
rency.
The idea of creating Eu robond s wou ld allow f or a join t
responsibility of the Euro countries for the issuance of
sovereign debt within the Monetary Union. In political
terms, Eurobonds would represent the add ing of a mutual
guarantee on the Euro countries’ debt [8]. From a legal
standpoint, the creation of this sort of European debt
would require a revision of Article 125 of the Treaty on
the Functioning of the European Union which prohibits
the existence of any kind of liab ility—from the Union or
from the Member States—with the commitments taken
by the governments of other countries, i.e., the prohibit-
tion of the so-called bailout of the Member States.
By the end of 2011 the European Commission pre-
sented a report on the possible creation of so-called
Eurobonds, referring it as stability bonds, which drew
different scenarios for the issue of these bonds. The main
objective would be to ensure access to international
markets for all countries in the Eurozone, at reasonable
interest rates. The Commission distinguished between
different models of Eurobonds, providing either the is-
suance of common total debt of Eurozone countries, with
full joint guarantee of all Member States, or a partial is-
suance of the debt of the States, up to a percentage of the
gross domestic product of each country with the joint
guarantee of all states up to this li mit—the so-called blue
bonds, unlike the remaining national debt which should
be issued at higher interest rates, or the red bonds. Apart
from these two models, the Commission also established
a third kind that was the common issue of the debt of
5The six-pack is composed by five regulations and one directive and
entered into force on December 2011. It applies to all Member States,
b
ut with some specific rules for the Euro countries, especially regarding
financial sanctions. The six-pack does not only cover fiscal supervision,
b
ut also macroeconomic surveillance under a new macroeconomic
imbalance procedure.

The Euro Crisis. What Went Wrong with the Single European Currency? 88
countries in difficulty, but without joint guarantee from
other Member States. In the latter case, as it did not in-
volve any form of liability from other Euro countries, it
would not be necessary to amend the referred provision
of the Treaty.
Beyond the fact that they could work as remedy
against the deadly crisis of the Euro, Eurobonds could
provide other benefits for the functioning of the Euro-
pean debt market by the effect of scale they would gen-
erate. In fact, European countries could create a bond
market with the same size as the United States, and
higher than Japan, countries with similar problems in
terms of sustainability of public finances, but which
manage to be financed by international markets at lower
rates than the Eurozone countries.
The German reaction to the Commission’s study on
Eurobonds did not take long. Indeed, Chancellor Merkel
reacted to the Commission draft considering the creation
of Eurobonds as a very disturbing and inappropriate sce-
nario because they would allow for mutualizing Euro
area countries’ government debt, a case which did not
solve the crisis. In Germany’s view, the creation of Euro-
bonds would determine a union of transfers within the
single currency, making German taxpayers to bear the
costs of financing other Euro countries.
Another strategy regarded with a potential deterrent
effect against speculative attacks to the Eurozone coun-
tries would be to allow the European Central Bank to act
as lender of last resort. Indeed, the main problem affect-
ing the existing European bailout funds lies on scarce
allocation of financial means, namely if they have to as-
sist larger economies such as Italy or Spain. With the
recognition of such a function to the European Central
Bank the problem would have been solved because this
institution has potential unlimited financial resources,
since it holds the exclusive right to authorize the issue of
banknotes within the Eurozone, according to Article 128
of the Treaty on the Functioning of European Union.
Thus, conferring the European Central Bank the role of
lender of last resort within the Eurozone would eliminate
the financial markets fears regarding an eventual default
of Euro countries that face liquid ity problems [7].
This solution raises some difficulties within the Euro-
pean Union, mainly from a legal perspective. In fact,
Article 123 of the Treaty on the Functioning of the
European Union prohibits direct purchase of government
bonds by the European Central Bank. That is to say, the
European Central Bank can not intervene in the so-called
primary market debt of the Eurozone countries. However,
this institution may purchase those bonds in so-called
secondary market, a situation that has been taking place
since 2010 with the acquisition of securities from Greece
and Portugal, and later from Spain and Italy.
Beyond these legal hurdles, which would require the
amendment of a Treaty provision, conferring this task to
the European Central Bank also raises some ideological
issues. Indeed, Germany feared that this could create a
roar in the monetization of the Euro countries debt, with
risk of increased inflation [7]. On the other hand, it was
also concerned that by assigning this role to the European
Central Bank—like the U.S. Federal Reserve, or the
Central Bank of the United Kingdo m, which go to finan-
cial markets to purchase their own sovereign bonds—it
could send a negative signal to the Euro periphery, with
risk of moral hazard regarding the break of fiscal disci-
pline within the Monetary Union [8].
5. The Fiscal Treaty
The worsening state of the whole Euro area from the fall
of 2011—with a risk of contagion of sovereign debt cri-
sis to Italy and Spain, the Greek debt haircut and the
adoption of a second bailout for this country, the de-
crease of the financial rating of several Euro countries—
led the Euro crisis to enter into a new phase with un-
precedented contours. In fact, several major political ac-
tors of the European Union, as Mr. Sarkozy or the Presi-
dent of the European Central Bank, even admitted the
chance of the end of the Euro. Given the drama atmos-
phere lived in the Monetary Union, in which has not
missed a threat of expulsion of Greece from the Euro-
zone by Mrs. Merkel [9], the idea to create a Fiscal Un-
ion gained momentum, which would require an amend-
ment to the Treaties.
In this context, th ere were great exp ectations regarding
the measures that the December European Council sum-
mit would take to overcome the Euro crisis. There was a
wide consensus on the diagnosis of the crisis: the failure
of the Union to adopt a credible bailout system to assist
weaker Member States. The therapy for the weakness of
the Monetary Union could pass, in turn, by adopting one
of following alternatives: a significant increase on the
financial means allocated to the European Stability Me-
chanism; the issuance of Eurobonds; the prospect of the
Bank Central European to act as lender of last resort for
countries in financial need.
In the background of the negotiations were the Ger-
man demands for a further increase of fiscal discipline
for Eurozone countries, along with the strength of control
mechanisms by European institutions, and the adoption
of semi-automatic sanctions to the States that breached
fiscal policy rules. Given the feared collapse of the Euro
it would be expected if Mrs. Merkel obtained full ap-
proval on the requests of German financial orthodoxy by
her Eurozone partners, this would allay domestic fears in
Germany about fiscal reliability of the Euro periphery
countries and, as a result, it would favor a political deal
to endow the Euro with a strong firewall to fight against

The Euro Crisis. What Went Wrong with the Single European Currency? 89
speculative attacks on international markets. That is to
say it would allow reaching a reasonable balance be-
tween principles of fiscal policy centralized control and
of greater European responsibility.
Despite the fragility of the situation, the European
Council decided to carry out a new intergovernmental
treaty—without the agreement of the United Kingdom
and the Czech Republic—with the goal to establish a
Fiscal Compact. The political agreement reached with
the Treaty introduces the principle of States balanced
budgets, with a new structural deficit limit of 0.5% of the
gross domestic product—which should be introduced
into their national legal systems—complemented by an
automatic correction mechanism that shall be triggered in
the event o f deviation; it constrains coun tries with exces-
sive deficit procedure to a long lasting adjustment pro-
gram, carried out under European control; it provides for
the automaticity of the sanctions proposed by the Com
mission; and a mechanism will be put in place for the
ex-ante reporting by Member States of their national debt
issuance plans.6
Thus, the Fiscal Treaty acknowledged the German re-
quests of strict fiscal discipline, which will be attached
with the strengthening of European control and com-
pleted by the automaticity o f sanctions. Out of the agree-
ment remained what was expected to be the price that
Member States paid for having accepted the rules that
embody German financial orthodoxy in the working of
the Monetary Union, i.e., to provid e the Eurozone with a
deterrent firewall against speculative attacks to the most
vulnerable countries. Therefore, the Fiscal Treaty repre-
sents a clear mark of German hegemony within the Un-
ion, in the sense this country was able to defend its
global interests, as well as to make the others accommo-
dating to the wh ole set of its preferences in the function-
ing of the Euro.
6. The New EU Balance of Powers
The Euro crisis, and the way it has been approached over
time, had also a profound effect at the institutional level.
Indeed, the Euro crisis has been managed since its incep-
tion by the European Council, which met with such an
unprecedented frequency that trivialized the summits of
EU heads of government. If in the past the European
summits were quite un common events, restrained to four
annual meetings, with the Euro turmoil became almost a
monthly happening, which allowed the Member States to
assume directly the management of the crisis. In contrast,
the Union institutions were apparently removed from the
European stage. Therefore, the Euro crisis has strength-
ened the intergovernmental nature of the Union with the
European Council playing the role of an economic gov-
ernment.
However, and despite the preeminence of the Euro-
pean Council in the working of the Union, the Euro crisis
revealed a most disturbing reality, namely, the existence
of a true European political director ate. Indeed, Europ ean
summits were preceded, invariably, by bilateral meetings
between the German Chancellor and the French President,
in which they agreed strategies to present to their Union
colleagues. Hence, the meetings of the Franco-German
axis conditioned the European Council conclusions inso-
far it shaped the debate between heads of government to
the positions and interests predetermined by the major
Eurozone powers. Moreover, the long-lasting of the crisis
has highlighted the growing subordination of France to
the German positions, with the first being unable to
counter, or even deter, the orthodoxy of the solutions
advocated by Chancellor Merkel.7 Thus, the Euro crisis
favored the unchallenged assertion of a German hegem-
ony in the European Union [10].
In institutional terms, one of the main victims of the
Euro crisis was the European Commission. The institu-
tion that according to the Treaties represents the general
interest of the Union was relegated to a secondary role
during the financial turmoil that hit the Euro . In the past,
the Commission had always acted as a counterweight to
the influence of the Member States, in particular the most
powerful ones. It was, therefore, the institution in which
smaller countries identified more because it was able to
provide a protective shield against the hegemony of the
big Member States. During the Euro crisis, the big coun-
tries took the lead in the political process in a blatant way
relegating the other States to an almost ritual role of tak-
ing their seat at the European Council meetings, and giv-
ing their approval to prearranged solutions adopted by
the Franco-German axis. Meanwhile, the Commission
seemed to fit with the new soul that crossed the European
Council, being unable to tak e the initiative for alternative
solutions and accommodated to the priorities presented
by the most powerful, to the detriment of the general
interest of the Union in overcoming the Euro crisis soon.
Beyond the Commission, the European Parliament was
the other institution deeply affected by the Euro crisis. It
should be remembered that Parliament was the institution
that gained more political p ower across the constitutional
changes that took place in the Union during the last 20
years. With the Lisbon Treaty, the Parliament became an
institution with wide budgetary an d leg islative powers, in
addition to the political control over the Commission.
7The election of a new President in France, François Hollande, which
defeated former President Sarkozy in May 2012, seems to pave the way
for a more balanced relationship between France and Germany. Indeed,
during the 20thEuropean Summit devoted to the Euro crisis, in June
2012, France supported claims presented by Italy and Spain, making
Chancellor Merkel to come to terms.
6The Fiscal Treaty was signed on March 2012, officially named as the
Treaty on Stability, Coordination and Governance in the Economic and
Monetary Union.

The Euro Crisis. What Went Wrong with the Single European Currency? 90
Therefore, the Parliament must be regarded as a crucial
institution in the political process of the Union.
However, the European Parliament passed almost un-
noticed throughout the whole period of crisis that hit the
Monetary Union. If it is true that some of the affected
areas were located within the jurisdiction of the Member
States, which would prevent the action of the European
Parliament, it is also a fact that the European Parliament
has never been able to appeal the attention of the media
as the main political forum of debate on European issues
and to influence the Union’s political agenda through its
initiatives. A parliamentary institution that proves not to
be able to act as representative of the democratic legiti-
macy resulting from the direct vote of the citizens, and
attract the attention of the European public opinion dur-
ing the greatest crisis of European integration, can h ardly
aspire to be the center of the political process and be the
major source of legitimacy in a further stage of a Euro-
pean Political Union.
Thus, it can be stated that despite its legislative job in
the adoption of the six pack to strengthen fiscal discipline
of the Member States, the European Parliament has been
relegated to a marginal role during the Eu ro crisis. In this
way one can understand Helmut Schmidt urging to the
current President of the European Parliament for the in-
stitution to be able to make it s voice across the European
public space, in order to have some influence in the path
to overcoming the crisis [11]. Otherwise, the unbearable
lightness of his behavior during the Euro crisis risks
downgrading it to a level of political irrelevance.
Still, and in political terms, the Euro crisis may have
added a positive side to the functioning of the European
Union. Certainly, the crisis of the single currency had the
effect of introducing one of the darkest areas of European
construction in the public debate: monetary integration.
Indeed, since the late 1960s that this area had been the
subject of monetary cooperation within the framework of
the European Communities. However, the scope of dis-
cussion was restricted to slim technical elite, controlled
by those who were responsible for monetary policy at the
national level. Thus, the opacity of the field of monetary
cooperation through the entire period the so-called Mo-
netary Snake as well as the European Monetary System.
Likewise, the negotiations on the Economic and Mone-
tary Union passed almost unnoticed from the public—
they were controlled by the leaders of national central
banks—in contrast to what happened in the intergovern-
mental conference on the political union.
With the advent of the sovereign debt crisis and its
evolution to a crisis of the Euro system, the Monetary
Union gained unprecedented visibility in the European
public sphere. In fact, it became an issue of wide public
discussion, beyond the inner circle of the technocratic
elite that dominated monetary theories and the financial
jargon. For those reasons, monetary integration has ac-
quired prime time standing within the European political
issues, and this allowed the public opinion of the States
to acquire a better knowledge of the interests at stake, the
costs and benefits of the single currency, the national
preferences and the balance of powers underlying the
decisions taken in the Eurozone. Mainly, the Euro crisis
will have the merit to increase the level of transparency
in the debate on monetary issues, clearly showing who
has the leading power, in real terms, within the European
Union.
7. Conclusions
Since the 1960s there was a European cleavage in the
area of monetary affairs between deficit countries and
strong currency nations. The former were leaded by
France, and the latter were under German guidance. The
fact that by the time the Deutsche mark had become a
reserve currency in international terms, allowed Germany
to set the rules to the different experiments of European
monetary cooperation that took place after the decline of
the Bretton Woods system, such as the Monetary Snake
and the European Monetary System.
With the end of the cold war, France wanted Germany
to show a clear European commitment in order to agree
with its fast process of national reunification. The result
was the decision to move from currency cooperation to
monetary integration, which should lead to the creation
of a single currency, the Euro [12].
However, during the Maastricht Treaty negotiations—
that established the Economic and Monetary Union—
Germany was able to impose its preferences regarding
the future shape of the single currency. Among those
preferences there was the no bailout clause of indebted
countries, and later a centralized supervision on fiscal
policy that allowed for sanctioning the Euro countries
with large budget deficits.
The outbreak of the Greek sovereign debt crisis un-
covered the structural weaknesses of the Euro system,
namely the absence of stability mechanisms to support
countries in financial need. Despite the risk of contagion
to other Euro co untries, in a first moment northern States
preferred to stress the need for the affected nations to
take severe austerity plans [13]. Behind this perspective
was the well-known stance that deficit countries should
bear its own costs of adjustment, otherwise there would
be risk of moral hazard.
Overtime, Euro crisis management mixed the prince-
ples of increased centralized fiscal policy control—from
the six pack to the Fiscal Treaty—with growing Euro-
pean responsibility that allowed for the creation of cur-
rent bailout mechanisms. Nevertheless, the balance be-
tween centralized control and European liability clearly

The Euro Crisis. What Went Wrong with the Single European Currency? 91
benefited the former, which prevented the Euro countries
to establish the much needed firewalls that could deter
financial speculators.
Moreover, the Euro crisis was a hard proof for the po-
litical authority of European supranational institutions.
Both the Commission and the European Parliament were
unable to counter the almost absolute role that the Euro-
pean Council played since th e eruption of the crisis in th e
field of European economic governance. Besides, the
political process tend to be ruled by major European na-
tions, which means that small and medium Member
States are less capable to voice their concerns and protect
their interests than they used to be.
Twenty years after the signing of the Maastricht Trea ty,
which established the legal framework for the creation of
the European single currency, Germany seems to take the
lead over the European Union political process, in the
sense that it is the only country being able to impose its
own views and preferences within the European deci-
sion-making. This situation could turn to be the utmost
irony of the Euro history if one recalls that with Mone-
tary Union France wanted them to give up the Deutsch
mark in order to prevent a sort of Germanized Europe.
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