The “shock and awe” bailout package announced by the European
Union — a $955 billion bailout for member governments — is an
attempt to defy the centrifugal forces of past fiscal profligacy
and subterfuge on capital markets. It is clearly provoked by the
most obvious symptom of the failure — a steady depreciation of
the euro on world currency markets, from $1.51 in December 2009
to its current value of just $1.30. This decline in the euro’s
value reinforces the lesson that the consequences of flouting
the fiscal ground rules of a monetary union are inescapable. The
Maastricht Treaty founding the eurozone laid down these rules,
limiting member nations’ debt-GDP ratios and annual deficit-GDP
ratios. But after several rule violations during the early
2000s, including some by major eurozone countries, and
unwillingness to acquiesce to the pact’s tough penalties during
economic recessions, eurozone members gradually weakened the
pact’s fiscal stability conditions. The current crisis, starting
with Greece but clearl