Who pays when the euro gets into trouble? Almost everyone, it seems, but in different ways. After the euro's inception, low-inflation countries like Germany, the Benelux countries, Austria and Finland, suffered interest rates that were far too high for them as the European Central Bank fought higher rates of inflation in Spain, Portugal Italy, Ireland and Greece.
The possibility of a Greek government default has changed the cost of euro zone membership permanently. By June 2010, the German government had gang-pressed all 16 member states in the euro zone into contributing two-thirds of contributions to a new European Financial Stability Fund, which would be topped up by the IMF to reach a total of 750 billion euros. If anyone doubted whether these contributions were voluntary, they were dispelled by a vitriolic attack on Slovakia by the German government when the Parliament in Bratislava refused to ratify the Slovakian commitment. So we now have the first principle of who pays for the euro: all the member states do. (Instead of Greece and similar countries paying by being forced to leave). But for how long will countries that are in better shape have to foot the bill for their weaker and less disciplined neighbours?
Permanently, it seems. In November, France and Germany reached agreement on making the Stability Fund permanent rather than temporary. Both of them were aware that competitive devaluations of countries being forced out of the euro would hurt them, and that pressure on the weakest links of the euro zone would continue as long as the Stability Fund remained temporary. The result is that the no bail-out clause of the EU Treaties, which states that countries will not be held responsible for the debts of their neighbours, will have to be re-negotiated. To prevent further domestic backlash, expect German governments to bolster their credentials as economic conservatives by exerting sustained pressure on high-debt countries to reform their finances. This will be a long-standing feature of European macroeconomic policy for a long time to come.
The agreement also shows the primacy of Franco-German deals on the foundations of Europe's economic constitution, and not the efforts of other actors. Germany and the Commission both entered talks to make the Fund permanent demanding automatic sanctions on deficit sinners, only to be blocked by Paris, which insisted on a measure of political discretion that typifies the Excessive Deficit Procedure that currently applies to euro zone members. Greater institutionalised pressure will be brought to bear on countries like Greece, but because of powerful countries pushing for it. Not because of any autonomous power of European rules and institutions. Herman van Rompuy, the new President of the European Council, in whom pro-Europeans placed so much hope to promote coherent European government in the Council, found himself and his plans for automatic sanctions sidelined by traditional Franco-German summit that was presented to the rest of the Union as a fait accompli.
Fiscal conservatives can relish in the fact that countries like Greece will pay a price, however. That price is to bond markets, which are waking up and charging all of southern Europe and Ireland more to borrow than other euro zone countries.