"Events in Greece have brought the euro area to a crossroads: the future character of European monetary union will be determined by the way in which this situation is handled." Jens Weidmann, Bundesbank president and European Central Bank governing council member, Hamburg, May 20.
By rights, the ECB could have abandoned Greece long ago. Nothing in the rule book says it must prop up countries at risk of economic collapse. If anything, the architects of the monetary union, launched in 1999, envisaged the opposite. Because members would share a currency but not spending and tax policies, governments were meant to take responsibility for their own finances –the "no bail-out" principle was enshrined in a European Union treaty. Logically, a nation that flouted the rules as recklessly as Greece should be left to its fate.
Faced in recent weeks, however, with the renewed fears of a Greek default, the ECB has balked. With increasing vehemence, the euro's monetary guardian has warned of catastrophic effects across the 17-country currency union. Jean-Claude Trichet, ECB president –with less than six months before his eight-year term expires –has refused to discuss any debt restructuring for the nation, storming out of a meeting of eurozone finance ministers in Luxembourg this month when it was raised.
His colleagues, including Mr Weidmann of the Bundesbank, have raised the stakes. They warn that if politicians take even a modest step towards a restructuring, the ECB will cut Greek banks off from its lifesaving liquidity supply, triggering a financial collapse that would push the country's economy into the abyss. It is the central bank equivalent of nuclear deterrence: defy us and we will blow up the world.
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