The EU/Eurozone participate in the rules-based international order, but they break its financial rules in both letter and spirit. The global financial system is a cornerstone of this international order. Rules for its operation have been devised by several global bodies. The bedrock is a proper accounting for the scale of the liabilities of governments and the wider public sector. The EU and the Eurozone member states fail to adequately account for their liabilities, undermining Eurostat's 'General government gross debt' as a reliable figure. The discrepancy consists both of shadow debts and unrecognized contingent liabilities as guarantor. The EU's 'General government gross debt' is understated by 44% if one takes account of the shadow debts, and by 70% if one factors in the contingent liabilities as well. Incomplete accounting masks the degree to which member states are out-of-compliance with the Fiscal Stability Pact. It is a threat to global financial stability where a major set of participants in the system understate their liabilities, because that leads on to the public credit rating agencies over-rating the respective entities' debts, and in turn to other participants in the system setting aside too little capital to account for the risks they are running by doing business with these entities, and/or to other participants - like Central Counterparties running clearing houses for derivatives - requiring too thin a security margin. The Euro currency is structurally weaker than it is made to appear, and both Eurozone and non-Eurozone member states in the EU have higher liabilities than Eurostat reports. Central banks, monetary authorities and investors outside the EU should be pressing for disclosure of detailed information on these liabilities, as well as ensuring that their own financial markets and practices do not replicate the related practices. There are also important implications for the EU's plan to onshore - particularly from London - the clearing of Euro derivatives contracts, because a clearing house should enjoy an adequate collateral margin and the collateral itself ought to be of the highest quality.
