Addressing the European seminar, Professor Lex Hoogduin, director of the Dutch Central Bank, considered the paradox that while the European Central Bank had been successful in meeting its targets, it was now seemingly in crisis. He described one assumption and two conditions underlying the Euro’s creation that had proven incorrect.

The assumption had been that currency stability could be managed at a European level, and that market forces would hold national wages and prices at competitive level. The two conditions had been that fiscal prudence would be maintained and that there would be no bail-outs. None of this had occurred, with a result that public finances had deteriorated in certain countries while low interest rates had fuelled inflationary bubbles and that this had been compounded by the erosion of public finance in the wake of the financial crisis emanating from the United States. Intervention was necessary, not to bail out countries, but to guarantee the assets underpinning the whole financial system.

What was needed was a European solution to a European problem. This should entail a full commitment to the stability and growth pact and a  surveillance procedure that guarantees long-term compliance. There should also be a crisis mechanism that conforms to international standards and, only when that all fails, a rescheduling of debt rather than any further bail-outs.

Questions followed thick and fast. What would stop states violating the new pact? Should Ireland renegotiate the terms of its rescue package? What would guarantee the security of the financial system? Should governments be the ones to provide the guarantee for what the market sees as useless assets? And with the debate still raging, the formal part of the seminar came to an end with a tacit agreement to meet in a year’s time to see what progress had been made.

You can read the full speech here in pdf.