Europe must stop blaming others and start addressing structural problems ? including deciding a form of fiscal integration
The eurozone has yet to address the fundamental structural problem with the euro: it is half-baked. We have a monetary union that to function well requires fiscal union, but we have no such fiscal union and little prospect of one. Key malfunctions are that some countries suffer an artificially high exchange rate and others an artificially low one. Similar mismatches occur with interest rates. Without national currencies there is no mechanism to make sure that eurozone nations' imports and exports between themselves ever come back into balance.
These dynamics have given an economic boost to some countries, such as Germany, and have acted as a growth depressant in other countries, such as Greece. While this lack of a fiscal union is far from being the only culprit behind the Greek deficit, it is an important factor, and one that must be resolved if the euro is to have a future.
Until the eurozone recognises this, we won't see effective reform and this inadequate response is already having repercussions for global financial markets ? in the UK on Tuesday, the FTSE 100 fell through the 5,000 point mark for the first time in over a year.
There is also a danger that as Europe's political elite rush to cobble together rescue deals; we will end up with fiscal transfers anyway, just ones that are poorly designed. Some argue that the European Financial Stability Facility, which has been granted the power to issue bonds backed by the eurozone countries for the purpose of extending loans to countries in crisis, is an example of this. A clumsily constructed fiscal union will only elevate political divisions.
To be clear, "fiscal transfers" does not mean that Brussels should dictate the tax policies of all eurozone countries. The US provides a good example of a monetary and fiscal union where the individual states still enjoy significant tax autonomy. The US government imposes a federal income tax, but individual states are free to introduce additional state income taxes at the levels they see fit. Sales taxes are solely at the discretion of individual states, and public spending also varies significantly from one state to the next. Congress sets the federal budget, but beyond this it has very limited influence on the fiscal policies of individual states.
Of course, taxpayers in creditor countries such as Germany will not welcome the prospect of paying off other countries' debts. It falls to Angela Merkel to communicate the benefits of a well-functioning single market and currency to her electorate, such as trade advantages and increased competition. The appeal to the German public would be to act in its own long-term interests, instead of getting distracted by short-term costs. If the crisis is managed well, it could actually be an opportunity to strengthen the EU, but a degree of honest self-criticism is required from politicians and central bankers that we have yet to see.
Throughout the eurozone crisis, Europe's leaders have been highly critical of market speculators that have sold European government bonds they do not yet own, and credit rating agencies (CRAs), which have regularly downgraded European countries. The latter, in particular, is an industry desperately in need of reform, as three firms, S&P, Moody's and Fitch, currently have what amounts to a monopoly in this market. CRAs have made some poor calls in the past, for example, giving Lehman Brothers a healthy A rating just days before it went bust, and unfortunately they cannot be held legally accountable for their ratings in many countries, as these ratings are classified as "opinions" rather than statements of fact. However, despite being unaccountable, these companies have significant influence over democratic governments, partly as a result of their ratings being incorporated into financial legislation around the world.
While speculators and CRAs have very likely intensified Europe's troubles, they are not the source of them. Europe must stop blaming its problems on third parties.
Instead, Europe needs a more honest and nuanced debate. There are many options for reform, including reintroducing some domestic currencies alongside the euro, alternative mechanisms for preventing persistent current account imbalances within the eurozone, as well as a range of degrees and means of fiscal integration.
Until we move beyond a polarisation between dogged defenders of the flawed status quo, and those who want to give up on the whole thing, we are faced with the worst failure of all ? the deep irony that a project that was foremost about cementing European harmony after centuries of conflict has now itself become a cause of resentment and dispute between member states.
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