December 22, 2011 Reading Time: 2 minutes

A recent news item in The  Washington Times describes the political situation among European countries. In the article two opposite suggestions of how to deal with the crisis can be clearly seen among European policy makers. Take, for instance, the following paragraph:

When it was launched in 1999, the euro came with a set of rules limiting debt to 60 percent of gross domestic output and deficits to 3 percent of GDP. But they were never seriously enforced and have been broken 60 times over the past decades by a number of countries, including Germany. […]

To toughen enforcement, Germany is pushing for the right to take countries in violation before the European Court of Justice. Significantly, Merkel said at a later news conference with Austrian Chancellor Werner Faymann that the new rules would do no more than enforce what is already in the EU treaty — and therefore would not require referendums to take effect.

Isn’t that what rules are for? What’s the point of having rules if there is no enforcement (or self-enforcing) mechanism? Seems to be that the solidarity between Euro Area countries does not apply to macroeconomic stability. “Solidarity” is not just having one central bank for all the member countries, but includes also keeping budgets and debt under control so that a debt crisis does not spread out to all other Euro countries. Two important aspects of the European crisis need to be dealt with: the short-term problem and the long-run stability. But what is important to understand is that no short-term solution will work efficiently without a clear long-term solution or commitment in place. This latter aspect is still lacking, just making the short-term situation worse. If there are no clear costs for deviating from the Euro agreement, then these rules should be developed sooner rather than later, and with a strong commitment signal from policy makers to signal what Europe’s regime structure will look like in the long-run (investments, after all, depend on long-run expectations). But this does not seem to be on the priority list of the Euro countries.

Merkel reiterated her objection to so-called Eurobonds guaranteed jointly by all EU nations. Germany has objected on the grounds that the idea would lessen incentives for fiscal discipline, since profligate countries could still borrow by relying on the good credit of ones with solid finances.

The issue of Euro bonds guaranteed jointly by all European Union countries clearly has the wrong incentives to solve the underlying problem: fiscal deficits. If the bonds are going to be guaranteed by the budget of other countries then the issuer country does not need to adjust their budget in order to honor their debts, but instead call for other countries to do so. Wouldn’t, and shouldn’t, a country with solidarity concerns equilibrate its own budget to avoid costs to their fellow countries? If the problem is about finding a collateral for new bonds, then the new bonds could be convertible on the equity of government firms, or they could use public assets as collateral. Therefore, if the country could not pay its debt, then the collateral would become privatized, thereby reducing the budget size and protecting the investment of the bondholder.

Nicolas Cachanosky is a doctoral student in economics at Suffolk University, as well as a previous Sound Money Essay Contest winner.

Image: Kittikun Atsawintarangkul/

Nicolás Cachanosky

Dr. Cachanosky is Associate Professor of Economics and Director of the Center for Free Enterprise at The University of Texas at El Paso Woody L. Hunt College of Business. He is also Fellow of the UCEMA Friedman-Hayek Center for the Study of a Free Society. He served as President of the Association of Private Enterprise Education (APEE, 2021-2022) and in the Board of Directors at the Mont Pelerin Society (MPS, 2018-2022).

He earned a Licentiate in Economics from the Pontificia Universidad Católica Argentina, a M.A. in Economics and Political Sciences from the Escuela Superior de Economía y Administración de Empresas (ESEADE), and his Ph.D. in Economics from Suffolk University, Boston, MA.

Dr. Cachanosky is author of Reflexiones Sobre la Economía Argentina (Instituto Acton Argentina, 2017), Monetary Equilibrium and Nominal Income Targeting (Routledge, 2019), and co-author of Austrian Capital Theory: A Modern Survey of the Essentials (Cambridge University Press, 2019), Capital and Finance: Theory and History (Routledge, 2020), and Dolarización: Una Solución para la Argentina (Editorial Claridad, 2022).

Dr. Cachanosky’s research has been published in outlets such as Journal of Economic Behavior & Organization, Public Choice, Journal of Institutional Economics, Quarterly Review of Economics and Finance, and Journal of the History of Economic Thought among other outlets.

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