Euro in crisis


Efforts to fix the debt crisis in the eurozone highlighted the political, economic and regulatory complexity of currency management. The ESRC has funded several research projects that examine financial markets risk and international regulation throughout the world. By Arild Foss


I


N THE UK, the value of FTSE 100 companies has taken a severe battering as a result of the turmoil in the global markets. And across the Atlantic the US triple-A rating has been cut


for the first time, reflecting concerns about the large budget deficit and the political infighting. The global economic crisis is widely believed to


stem in part from the lack of regulation of global financial markets and the inherent systemic risk – and likelihood of contagion – that this created. Because of this ineffective regulation, it was possible for a local problem – the US sub-prime crisis – to occur in one financial market and then cascade to other markets around the world. In the European Union (EU) the quandary


is how to square national sovereignty with international finance – and international debt. Since the launch of the euro in January 1999, the European Central Bank has been in charge of the monetary policy of the countries in the eurozone but the supervision of the policy is up to each EU country. This made it possible for the


24 SOCIETY NOW AUTUMN 2011


Italian government to dodge highly unpopular austerity measures while the government debt kept climbing. “The role of the central bank is the major issue


at stake in this organisational structure, in particular, whether supervision should be a responsibility of the central bank,” Luis Garicano and Rosa Lastra state in the Centre for Economic Performance (CEP) Discussion Paper Towards a New Architecture for Financial Stability: Seven Principles. The researchers argue that a central bank needs


to have responsibility both for monetary policy and supervision. The central bank will at any rate have to ensure financial stability, as it is the only institution which can take on the role as lender of last resort, and has the necessary clout to enforce actions. “It is necessary that the European Financial Supervisory authority or authorities be endowed with authority to overrule and direct the National Supervisors,” they add.


“If governments do not co-operate when dealing with an international crisis but instead


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