It’s to do with payment systems. Bear with me.
In the U.K., payments between customers of different banks, or the banks themselves, are handled through a system called CHAPS. Briefly, what happens is this. Bank A needs to send some money to Bank B, so they send them a message – a payment instruction. This message gets copied to the Bank of England, with whom both A and B hold accounts. The Bank of England debits A’s account and credits B’s; B then knows it has the money and can dispose of it as per the underlying transaction. So far so good.
Until the late ‘90s, the totting-up took place once a day, after close of play, it being assumed that the system was based on trust and the Bank of England would carry the can should Bank A not cough up– until some bright spark there woke up one day and said “erm, actually, we won’t. Because they might break their promises, and we can't afford the consequences.” Thus was born the system known as Real Time Gross Settlement, or RTGS.
RTGS says, in effect, that Bank A must be able to afford the payment at the moment it sends the instruction to Bank B. In other words, it must have the money in its account at the Bank of England, there and then. If it hasn’t, it must ‘post collateral’, which means pledging items of value, such as securities, against this debt. In practice, payments tend to flow in both directions during the day between A and B (and there are of course the equivalent of overdraft limits before the need for collateral kicks in). So it worked fine for years.*
Then, enter the Euro. After a few false starts, they realised that they needed something similar, covering the Eurozone of seventeen countries, and after a few false starts they came up with a system which is an almost exact replica of the above, but with an extra layer added at the top – in addition to the Banks A, B etc. paying their national central banks (Bank of England equivalents), the national central banks would also need to settle with each other. Obviously, this would be done through the central banks’ central bank, the European Central Bank (ECB). The system they put in place for this is called TARGET.**
What they forgot, though, was RTGS. Remember that? Cash on the nail. Of course, TARGET provides for this within each country – but there is absolutely nothing that forces the national central banks – the countries – to settle with each other at the ECB. No totting up at all, ever, never mind payment by payment. Oh, and no need for collateral either. Just keep running up the debts – and dues– for ever.
Which is exactly what has happened. So now you know. That’s why there’s a Euro crisis. No recourse for broken promises.
If only they'd asked me at the time!
* I do wonder how it coped with the events of 2007-8. Hmm ...
** TARGET2, to be exact, if you want to Google it – the Wikipedia article is excellent, though it does require a bit of concentration.