So why did the founders of the euro fail to establish an exit mechanism for the weaker constituent parts of the eurozone? For the most cogent explanation, let’s turn to our friend, Greek economist Yanis Varoufakis:
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Two views of the Euro Zone by Marshall Auerback (h/t Kevin Fathi via email) Key paragraph:
“To our knowledge, the only one to challenge this benign view was Peter Garber in a 1998 paper on the role of TARGET in a crisis of monetary union (Garber, 1998). The paper insightfully recognized that the federal structure of the Eurosystem and the corresponding continued existence of national central banks with separate individual balance sheets made it possible to imagine a speculative attack within monetary union. According to Garber, the precondition for an attack “must be skepticism that a strong currency national central bank will provide through TARGET unlimited credit in euros to the weak national central banks”. His conclusion is that “as long as some doubt remains about the permanence of Stage III exchange rates, the existence of the currently proposed structure of the ECB and TARGET does not create additional security against the possibility of an attack. Quite the contrary, it creates a perfect mechanism to make an explosive attack on the system”.
Source: “Sudden Stops In The Euro Area”, Silvia Merler and Jean Pisani-Ferry, (Bruegel Policy Contribution, March 2012)