But the eurozone is not a traditional monetary jurisdiction. On the contrary, it is a remarkable experiment of a kind never before attempted, in which 17 governments and nations share one currency and central bank. Under its founding document, the Maastricht Treaty of 1992, the European Central Bank was forbidden to lend on overdraft to governments. Member governments therefore could not borrow freely from the central bank. In that sense, they had lost part of their power to tax and reduced their own creditworthiness. Even worse, countries can leave the eurozone and restore national currencies, in which case deposits lodged in the banks of countries exiting the single currency could be redenominated into new local currencies. Such redenominations, and other contract upheavals, could overnight wipe out 20 or 30 per cent of the value of inter-bank deposits.
The essence of the eurozone banking crisis is that, since the closure of the international wholesale money markets in August 2007, sovereign debt and inter-bank claims have lost a great deal of value and become extremely risky assets in a way that is inconceivable in the standard one-government, one-money situation found in most of the world. Indeed, if the eurozone broke up, hundreds of banks within it would be bust. If mishandled, the implications could be disastrous not only for the eurozone, but also for the rest of the world.
Repeat: banks can be geared up to 15 or 20 times. So if banks in North America or Japan were to hold claims on eurozone banks equal to a mere 7 or 8 per cent of assets they too would be endangered by the eurozone's disintegration, even if their main businesses are thousands of miles away and for the most part in good shape. That is why the rest of the world must worry about the eurozone's tensions and difficulties. Whatever happens, the eurozone shambles has been the worst setback to the cause of European integration since the 1940s.