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European monetary union: From Orange County to Belgium

Bernard Connolly, whose critical book The Rotten Heart of Europe lost him his job at the European Commission, continues to write unwelcome truths about the Maastricht Treaty and "Euroland" after January 1999. Here, he looks at the future of no-longer-sovereign government bond markets. Good news for Italy, bad news for Belgium.

Anyone tempted to take the Maastricht treaty at face value as a guide to what might happen to bond markets in Euroland is being extremely gullible. The treaty was not written by people possessing a great deal of understanding or sympathy for financial markets. Many ends were left untied. Some of those omissions will be put right in secondary legislation, perhaps to be drafted in consultation with financial market participants. More on the working of Euroland debt markets will be gleaned from the monetary management blueprints that the European Monetary Institute (EMI) will offer before the end of this year. But the future is fraught with uncertainty.

The system created by Maastricht is a one-off. Maastricht sets up a monetary system by fiat but leaves it far from clear who, if anyone, is supposed to say "fiat"!

In the financial field, the essence of sovereignty is the ability to create money. A government that can get its own money used needs neither tax revenues nor the proceeds of debt sales to cover its expenditures. Instead it can be argued (with many historical examples, such as that of the Southern Confederacy) that the reason for taxation is to create an incentive for the subject to use the sovereign's money.

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