Greek problems don't need to doom the euro

The Greek financial system is in big trouble right now.

The fundamental problem is that the Greek government has been on a bit of spending bender over the past few years and has borrowed a lot of money to pay for this, all of it denominated in euros.

It has become frighteningly clear that this level of debt is unsustainable and the Greek government needs truly radical fiscal reform to avoid defaulting on its outstanding debt.

Much of that debt is held in the form of Greek government bonds by Greek banks, but a large amount is also held by various financial institutions outside of Greece.

By itself this is not really a very interesting or important situation. There are a large number of countries in the world and inevitably, some of them get into fiscal trouble. Some sort of financial crisis of this sort happens on a fairly regular basis. Greece is, however, a member of a monetary union. And its financial health could have an effect on the financial health of other members of that union.

The euro is a unique currency because it is issued by a collection of sovereign states, rather than by a single country as is usually the case. The currency was formally introduced into circulation in 2002 and replaced the national currencies of the participating countries.

Control of the euro money was given to the European Central Bank (ECB), which was created with the sole purpose of managing the euro.

When the euro was created it was very clear that all member countries would be using a single currency and would therefore be unified monetarily. It was not clear, however, how unified these countries would be in fiscal terms.

There is no governmental equivalent to the ECB. There is a European parliament, but there is no central government with authority to tax and spend for the European Union as a whole.

Fiscal matters are, in theory, left entirely to the individual member countries. This means there is no natural central source of funds to "bail out" the Greek government. The two bailout packages worked out so far have been hammered out via complex negotiations between Greece, the ECB, and other European governments.

Suppose Greece decides it is going to default on its government bonds. Does this necessarily mean that the euro as a currency is in trouble? Not necessarily. In fact, if there is no expectation that Europe is a fiscally united, then there should be no issue at all.