On Friday, the theme of fiscal resolution to the European problem was gaining ground once again
Pimco’s Mohammed El Erian, writing in the FT, expressed the idea as one of only two possible paths for Europe at this stage.
As he noted:
This will be done in one of two basic ways. Europe could opt for greater fiscal union, first de facto and then de jure. Cost-effective guarantees and transfers, rather than just loans, would stabilise the region’s debt dynamics through the aggressive use of a unified European balance sheet. In return, individual countries would sacrifice a significant amount of national sovereignty and fiscal policy discretion.
As an aside, his other potential solution sees countries taking a sabbatical from the eurozone, though not from the EU, until they get their house in order.
But back to the fiscal union solution. Stephen Lewis of Monument Securities offers some very interesting words on Friday.
He is of the opinion that the likes of Jean-Claude Trichet and Lorenzo Bini Smaghi are engaged in a political struggle, which envisions the establishment of a fiscal union between the eurozone’s member-states as a minimum for Europe. Indeed, as he puts it:
On the surface, this looks like a legalistic dispute but, in reality, it represents a struggle over the future of Europe.
Though, obviously, the problem still lies on the “political will” front. What’s more, as Lewis observes, it’s very likely that in an extreme scenario, markets will move faster than legislative processes can be taken to establish a fiscal union.
As he notes:
There is no denying such a union is almost certainly a necessary condition for smooth functioning of the euro arrangements and would also make the ECB’s monetary tasks less difficult. But a move in that direction would overturn the ‘no bailout clause’, an essential element in the Maastricht treaty that made monetary union acceptable to voters not only in Germany but in several other member-states of the zone.
It is highly doubtful whether the peoples of the euro zone’s flourishing nations would be any friendlier towards the idea of fiscal and political union now, when the prospect of making disbursements to less fortunate members of the zone is immediate, than in the 1990s, when it was presented as a theoretical possibility.
But EU technocrats, including those at the ECB, may hope the threat of currency chaos will induce a phase-change in sentiment, which will allow them to present fiscal union as the only option. They are, doubtless, aware that the peoples of Europe have never freely assented to join together in political union, not under the Roman Empire, in the days of Napoleon, or during the last century. Their problem is that the markets could move at too fast a pace for them to bring about any constructive change.
Though, at this point, anything really seems possible. Let’s face it, if you’d mentioned just three years ago that the eurozone would eventually be faced with “a unite or die scenario”, you’d probably have been laughed out of the room.
As a result, who knows what will become acceptable in the days and months to come.
Related links:
The fiscal union put – FT
Is fiscal union the only answer? – FT Alphaville
Doing the right thing in the eurozone - FT Alphaville