By now the problems of the euro are well understood, at least on this side of the Atlantic. As hundreds of Canadian commentators have patiently lectured Europe, the basic — elementary, really — mistake was to attempt to form a monetary union without also forming a fiscal union. Members of the euro faced no real constraint on their appetite for debt, but rather could borrow as much as they liked, without regard for the consequences for the others.
The effect, as we tried to explain to the Europeans, was to allow the weakest states to borrow on the good credit rating of the strongest. The consequences of any member defaulting on its debts would be so horrible for the rest, markets reasoned, that they were bound to be bailed out. The potential for moral hazard was childishly obvious: With other states implicitly guaranteeing their debt, yet without corresponding formal limits on their borrowing capacity, member states had every incentive to … to …
Er, hang on. Isn’t that more or less how the system works in Canada?
[More]
