EU Debt Crisis

Eurozone finance ministers met on Monday evening to discuss increasing the emergency fund but ultimately decided it was big enough. Is it?

At the moment it is enough. But the problem is a different one. You arrange a fund like this to send a signal to the market that there is no point in speculating against the currency. So by not increasing the fund, the eurozone finance ministers send a signal that there might actually be a point in speculating against larger countries like Spain. So in that way, they made the markets less stable, not more.

You don't think markets are convinced yet that the debt crisis is contained?

The funds are enough to support countries like Greece and Portugal, they are not enough to support countries like Spain, or Belgium, or Italy. It's an arithmetic game, and you come up with a number that's around one-and-a-half trillion, or two trillion euros and you come up with a guarantee where you can say, this is rock solid. The number is just so big that it becomes clear to everybody that a speculator can't win.

Another idea that had been floated prior to Monday evening's meeting, but was then not discussed, was that of bonds issued jointly by the eurozone countries. Is that a good idea?

It's a good idea in principle, but it's very far-fetched politically. One of the problems with the eurozone - and it's a problem from birth - is that monetary policy is done by the European Central Bank, but fiscal policy is done by each of the member states. And that creates almost perverse incentives for the individual member states to over-consume, which is what they have done.

One of the ways to solve this problem is to centralize fiscal policy, i.e. to make more fiscal decisions in Brussels. If you launch a euro bond, you essentially do exactly that because you then unify all the risks which you have in the eurozone. For it to work, you have to have a centralized fiscal policy. Interestingly, China and sovereign wealth funds are very keen for Europe to issue these bonds because they would be highly liquid and a good alternative to a US Treasury Bond.

Both the bigger emergency fund and the euro bonds are supposed to convince markets of the "irreversibility" of the euro, as Luxemberg's prime minister Jean Claude Juncker put it. Is the euro in fact "irreversible" or can you imagine a scenario in which this common currency would fold?

Nothing is irreversible. It would unravel the minute that Germany in particular were to make the tiniest suggestion about leaving. It would be possible to reverse the euro, but it would have catastrophic consequences. On one hand, you would see a bank run with weaker countries - everybody would try to get their money and put it in a German bank account and that would lead to an immediate collapse of the banking system in that country. It would be catastrophic for the European idea, for these weak economies, and if Germany were to decide to leave, it would not be good for Germany either because the currency would appreciate dramatically.

Next week at a EU summit, leaders are expected to agree on permanent Eurozone rescue mechanisms, since the current emergency fund expires in 2013. What could or what should these permanent mechanisms look like?

The issue of "permanent" only makes sense if the fund is large and credible enough. At the moment I don't see that we are getting any closer to making a credible long-term commitment to stability. The only really credible commitment would be to integrate fiscal policy further.

Interview: Andrea Roensberg
Editor: Tamsin Walker