A fiscal union today is both unfeasible and a folly

2011-08-29

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Those who advocate the establishment of a fiscal union today, misread the situation. Image Source: MASECO

In my latest articles on the euro crisis, I have stressed the dangers of (a) issuing jointly guaranteed eurobonds, thus mutualizing debt in a highly toxic manner, (b) appointing unelected bodies with excessive powers to control the crisis, (c) expanding the EFSF without revising its role in prior, (d) proposing the exit of some countries from the euro, (e) maintaining the same utterly failing approach to the very structure of the crisis, which is still seen by many policy-makers as a debt crisis, not as a systemic crisis of the euro, (f) continue the outrageous practice of using taxpayer money to fund expensive bailouts that end up into the black holes of the system.

All these and many other technical issues such as the necessary Treaty amendments, which will require years to be completed, make the creation of a fiscal union an unfeasible choice within the current framework. By the time all the necessary steps towards a fiscal union are made the euro will belong to history.

In theory and under the ideal conditions a fiscal union is more than necessary yet today any attempt to make steps towards that direction would be a sign of a serious misreading of the situation and a very foolish thing to do, since it will increase the problems instead of solving them. That is partially why the joint Sarkozy-Merkel letter utterly failed to convince anyone that current actions can stem the crisis, since the two leaders spoke about the future, guided by a naive ceteris paribus assumption.

Other things need to be done. The first is for certain European leaders to change their mode of thinking by first putting aside the populist rhetoric of “fiscally irresponsible” states and of the need for “fiscal discipline” and second by accepting that the crisis is a crisis of the system of the euro, a crisis that is deeply rooted in the structural flaws of the single currency. It is preposterous for some to talk about public debts, when the euro architecture lacks a wealth redistribution mechanism that would ensure balanced growth and convergence and when the European banking sector remains ill regulated, with banks being subject to their respective national authorities instead of a single European bank supervising body. The current approach European leaders have is leading with mathematical accuracy to the collapse of the euro, since some countries will eventually default on their debt obligations, while the toxic structure of the EFSF, will force others to follow the same path.

There needs to be a new strategy. Within the framework of this new strategy, three moves need to be done. The first is to allow the ECB to issue eurobonds (see my full analysis on the eurobonds issued by the ECB) so as to attract the surpluses of central banks and wealth funds outside Europe, thus putting an end to the catastrophic maladministration of taxpayer money. Second, mobilize the European Investment Bank to carry out structural investments across the European periphery, co-financed by the ECB’s eurobonds, so as to halt the spiraling recession and give a growth boost that will in the long-term stabilize the countries who now face serious shocks. Third, make the EFSF (which will in 2013 be replaced by the ESM) an authority that will supervise and re-capitalize (whenever necessary) the unified European banking sector.

Insisting on the establishment of a fiscal union, which is a long-term issue, as a solution to the short and medium term challenges of the euro implies a dangerous misreading of the current situation and a failure to understand the structure of the crisis.