It turns out that the Eurozone regulatory loophole Greece potentially used to understate its debt might have been purposefully created by the Eurozone itself — as a way to accommodate Italy’s entry back in 1997.
If so, it shows how one slippery exception can render an entire regulatory system irrelevant.
When the European Union predicted in 1997 that Italy’s budget deficit would exceed the threshold to qualify for the single currency, it buried in the fine print the observation that with “additional measures” the Italians could pass.
They did, thanks to a one-time tax and a yen-denominated swap. It was an early example of the balance-sheet fiddling deployed since then by countries eager to share the benefits of a $13-trillion market and lower borrowing costs, yet unwilling to cede control over their budgets, wages and welfare systems. Now Greece, by setting a standard for fiscal creativity, has exposed the flaws in Europe’s hybrid of monetary union and fiscal indiscipline.