In the 1990s when I was making the case against the UK joining the Euro, I came up with the analogy that joining it would mean taking out a joint bank account with the neighbours.
I explained that I like my neighbours. We meet for drinks or social events. We would help each other out in an emergency. We have never felt ready to have a joint bank account. I would always worry that just when I wanted to spend I would find my neighbours had already used the money I had put in the account. All of us involved would be concerned in case one neighbour ran up a huge overdraft and left the rest of us to pay it off.
The government and other proponents of joining the Euro at the time claimed this analogy was not a fair one. They stumbled to find a soundbite that could put down my thought. They sensed my comment was a poor characterisation, but could not explain how or why.
As we watch the Euro scheme unfolding, it seems ever more apt to say joining a single currency entails taking out a joint bank account with the neighbouring countries. Each country or neighbour that has overspent does indeed expect the rest of the zone to pay its bills for it. We have seen Greece, Portugal and Ireland so far obtain extra money to keep them going. There has also been an even bigger transfer of money through the European central Bank, where the joint bank account is kept. Euro 3 trillion has been rooted into the weakest commercial banks around the zone. The German banking surplus is recycled in this way.
The case of Cyprus illustrates just how crucial the common bank account is to the functioning of the Euro. The unwillingness of the neighbours to send extra money to Cyprus meant people in Cyprus could no longer draw their money out of their banks. In practice they no longer belonged to the Eurozone during their crisis, as they no longer have freely convertible Euros in their bank accounts. In order to get their deposits out of their banks with each Euro having its normal value, the ECB has to restore Cyprus to sharing the joint bank account. If the ECB does not honour the Cyprus accounts in full, they no longer have full value Euros to withdraw.
The political battles in the Eurozone are all about the extent to which the richer neighbours can control the spending habits of the poorer neighbours, and the extent to which the richer neighbours will allow the poorer neighbours to use their money. So far, with a bad grace, the richer neighbours have come up with the money it takes to keep the higher spending neighbours going, except in Cyprus. For their part the poorer neighbours are putting themselves through big tax rises and spending cuts in an effort to curb their appetite for their neighbours cash. Some think this will prove self defeating.
It has produced plenty of ill feeling between the neighbours. It has damaged the Franco-German alliance at the core of the project. Joining the Euro is just like having a joint bank account with the neighbours. Anything short of a full happy marriage makes it very difficult for such financial closeness to work.