Agreed, and Draghi has said the ECB will do "whatever it takes" to safeguard the integrity of the system  - admittedly somewhat belatedly following the Greek debacle. In fairness the ECB will probably respond that it will act as a backstop on condition the relevant member countries stay within the budget rules. You could hardly expect the ECB to underwrite massive and uncontrolled borrowing by a member state increasing its debt GDP ratio to unsustainable levels and then threatening to default if even more borrowing isn't allowed.

The difference between the ECB and a national central bank is that the ECB has to be concerned with 19 distinct national debts and has to "police" the system to ensure one or more of the 19 don't game the system at everybody else's expense. If a national government with it's own currency allows borrowing to become unsustainable, the national central bank can adjust interest rates, the money supply or devalue to recover competitiveness. Either way the impact is primarily on that countries economy and citizenry unless it defaults on external debts.

In the case of a common currency, all the other member states are impacted, and possibly quite adversely. You can argue that there isn't enough economic convergence to justify a common currency, or that it cannot be stable absent countervailing fiscal capacities and policies to deal with structural and regional imbalances, or that there simply isn't enough flexibility to deal with asymmetric shocks or sudden downturns. All true.

But there doesn't seem to be a huge divergence in economic performance between EZ and other EU countries, so the advantages and disadvantages of the Euro may be currently reasonably balanced. If a trend were to emerge whereby non-EZ members did consistently better on a number of key metrics then I'm sure there would be a move to either exit or reform. I don't think the case is currently clear cut either way.

Index of Frank's Diaries