The outline of a future European monetary union less vulnerable to crises than the current Franco-German design is beginning to emerge. It will need a banking union, including centralised supervision and resolution, as well as some common system of deposit insurance to curtail destabilising runs. It will also need stronger bank equity with minimum non-equity capital that can be bailed in when banks get into trouble. Sovereign debt ratios are now so high that future rescues by national treasuries will simply not be feasible, so the cost of debt to European banks will unavoidably be higher. The monetary union could do with a common macroeconomic policy – Europe as a whole is almost as closed an economy as the US.
But getting to first base in a re-designed monetary union means sorting out the current mess, and the willingness to accept and distribute losses is absent, largely because of the persistence of the belief that the crisis was caused principally by fiscal excess, and that sinners should pay. Sinners in this case means debtors.
There have been numerous papers arguing that the origins of the crisis were not fiscal, but principally monetary. Here’s another one, with references to some more:
The European economy faces a re-building task on a scale corresponding to the aftermath of a (small) war. One of the lessons of twentieth-century European history is that allocating blame is not a good re-construction strategy after wars. The current impasse bears comparison to the ‘sinners should pay’ response to WW 1.
After WW 2, with lessons learned, the blame-game was avoided to a considerable degree. It does not matter (except perhaps to lawyers) what caused the mess. What is the feasible allocation of costs (infeasible allocations include pretending that the Greek default was big enough, for example) that offers the best prospects of economic recovery?
The costs have not all been incurred – failing to distribute the costs already incurred lets them grow.