This FT article by Quentin Peel (I am told by a senior German who should know) brings out accurately an angle of the Eurozone’s problems which hitherto has not received much attention beyond Germany.

Namely the fact that the German Constitutional Court is watching very closely what the German Government is up to in dealing with errant members of the Eurozone:

While the 1998 judgment focused on the requirement that the government ensure that the currency union should be founded with “stability” at its core, the most recent Karlsruhe judgment on the Lisbon treaty, delivered last year, criticised the lack of democratic accountability of EU institutions, and insisted that the Bundestag remained the ultimate source of legitimacy.

What worries Brussels is that the German government interprets these judgments in a way that limits its room for manoeuvre in EU negotiations. That could make the economically most powerful state in the union difficult to deal with…

Hence stern noises coming from Berlin which favour Stability over Solidarity, perhaps even to the extent of letting the IMF step in and lay down the law.

The root of the problem is that those clever people who worked out how to set up the Eurozone had an MIF (Major Imagination Failure).

It just did not occur to them that an EU member state from the Knoblauchgürtel (Garlic Zone) would actually cheat by sending in dishonest information about its own performance. See a good piece at City Journal by Guy Sorman on this aspect.

Meanwhile another senior Brussels contact tells me that the idea of an EU fund set up by member states to act as some sort of guarantor for Greece is set to prevail. The aim is to show sufficient official collective EU determination to see off marauding financial markets.

We’ll see.

If Greece can not pay back its debts, someone has to lend it the money to do so. 

Are European taxpayers going to be keen to do that if they think that Greece is unlikely to be able to pay that money back?

And can Greece see its way to borrow more money at the higher interest rates needed because its economic management has been so poor, if that in turn will lead to even more debt interest repayments compounding up?

We’ll see. But as usual it is markets, not governments, which are behaving morally. Guy Sorman:

What’s telling is that the people who brought the hoax to light were neither the Greek nor the European authorities but private speculators.

The Greek state, to its great dismay, suddenly discovered that it could no longer sell treasury bonds on financial markets at the same rate as the Germans did. The open market had decided that euros owned by Greeks were not the same as euros owned by Germans.

Should we blame these private actors for exposing the truth? On the contrary: it was their professional duty to generate profits for their clients, often for their retirement accounts.

The public actors, for their part, were duty-bound in principle to manage the euro through predictable and transparent rules. It is therefore inappropriate for French president Nicolas Sarkozy and Greek prime minister George Papandreou to accuse private speculators of “attacking” the euro.

If the euro—at least in Greek hands—had been above suspicion, it would not have been attacked.

Spot on.