The Finance Chiefs of Germany, France, Italy and Spain have taken to the stage to discuss new plans for short-term and long-term management of fiscal and banking integration, coming after Cyprus becomes the fifth member of the common currency to request a bailout.
The finance ministers are meeting today to discuss closer union as laid out by a proposal from European Council President Herman Van Rompuy. The document proposed greater fiscal union, which could lead to common debt being issued by the Eurozone countries. There would also be banking union, with a single European banking regulator and a unified deposit guarantee scheme. Among other proposals were limits on the amount of debt individual countries can take on, annual national budgets can be vetoed if they are likely to mean a county exceeding its debt limits, the possibility of the Eurozone borrowing money collectively could be looked into, a European treasury office to be set up to control a central budget and keep an eye on national ones, common policies on employment regulations and levels of taxation, joint decision-making with national parliaments to give it democratic legitimacy. Though this seems to provide a groundwork for the progression of the Euro, many of the proposals are merely revisiting previous agreed upon regulations in the Stability and Growth Pact. These regulations failed in the past because of a coordinated supranational entity and a lack of enforcement. The failure of the SGP came because Germany and France, the countries responsible for the EU and the creation of the pact, violated its restrictions on debt. The Court of Justice (European Court of Justice) is an example of a supranational entity created to observe and ensure that EU laws, treaties and institutions are adhered to. Through the infringement procedure, the ECJ is able to place a fixed or periodic financial penalty. Nevertheless, this institution was not given the proper amount of authority into national areas of its members, thus making it unable to observe the political and fiscal matters of those countries that are now on the brink of default. So saying, the current list of proposals are nothing entirely new but debates circulating about a joint finance ministry may provide the supranational entity needed to enforce and regulate the further integration needed for the progression of the EU. In regards to steps towards effective integration, the European treasury would now be able to force Eurozone countries to make changes to their budgets to keep their deficit down, which previously was never enforced and merely left to the individual member states.
“Under these rules, the issuance of government debt beyond the level agreed upon in common would have to be justified and receive prior approval. Subsequently, the Euro area level would be in a position to require changes to budgetary envelopes if they are in violation of fiscal rules, keeping in mind the need to ensure social fairness.” – Herman Van Rompuy, European Council President
One of the catching points for forward movement by the EU is the divide surrounding join borrowing, something that has kept Germany and France from being the dynamic partnership that so many previously assumed them to be. It has generally been true that the EU’s movement has been driven forward when France and Germany are in step. However, they are not in unison anymore. There is a deep philosophical political divide between them, most evidently exemplified by the dissolution of ‘Mercozy” through the election of the socialist Hollande in France. The divide of the EU on joint borrowing is embodied by the concept of Eurobonds, which would be a way to allow countries that are currently unable to borrow money commercially to borrow at low-interest rates. Some countries, largest of whom is Germany,have resisted this step unless there is much closer fiscal union. The reason for that is that Eurobonds would have much the same effect as the original introduction of the Euro, which is that they would allow many government access to cheaper loans and therefore, without European supranational control over budgets, some countries would again take on unsustainable levels of debt. So saying, the Eurozone’s third smallest economy, Cyprus, has become another member to apply for rescue loans. The country is said to possibly need up to 10 billion Euros, more than half its 17.3 billion annual output. This comes after Spain formally requested up to 100 billion Euros in rescue loans to recapitalize its banks weighed down by bad loans from a burst real estate bubble. Both Spain and Cyprus are trying to avoid political humiliation and loss of sovereignty involved in a full state bailout program like those granted to Greece, Ireland and Portugal. The approaching Brussels summit is expected to agree on a growth package pushed by France, worth around 130 billion Euros in infrastructure bonds, reallocated regional aid funds and European Investment Bank loans. Spain, along with Italy, is likely to press at the summit for more urgent actions to lower borrowing costs and have proposed measures to reduce the difference in borrowing costs between Eurozone countries.
“The euro crisis is in some war mind-boggingly simple to solve…because it isn’t economics, it’s politics. If Angela Merkel and her colleagues stood there together with the rest of the Euro area…and if they behaved as a true union, this crisis would be finished this weekend.” – Jim O’Neill, Chairman of Goldman Sachs Asset Management
Germany however, is remaining rigid on its stance that it should not finance a country that indulged in excessive spending. Because of her rigid stance, Merkel has been target of much criticism and some have suggest that Germany be the country that exists the Eurozone. The support given is that Germany embodies the problem of the EU, the inability to balance polar opposites on the economic scale. The periphery countries of the EU are the ones in debt and the ones facing default. Not only is Germany’s economy inherently strong as a result of the high productivity of its workforce, its exports have added competitiveness because the Euro is undervalued as far as Germany is concerned. As long as the rest of the Eurozone countries are locked in the Euro with Germany, the only way for them to become more competitive is through austerity measures that cut government spending, reduce welfare budgets, cut wages and raise unemployment. These are the steps that have been taken for the past 2 years of the fiscal crisis and the aim has been to achieve export-led growth, like Germany. As long as Germany remains in the Eurozone however, its hypercompetitive stance will make redundant the measures being taken , as the periphery countries will not be able to compete against the power house. Nevertheless, the support for Germany’s exit may seem well based but its fails to address the fact that Germany is the only country keeping the Euro afloat, funding all bailout measures and without Germany and its seemingly endless pocketbook, the rest of the Eurozone would fall calamitously into a series of defaults and downgrades for years to come. This would ruin the regional fiscal infrastructure, ruin the global markets, and dissolve international trade with many of the nations dependent on foreign investment. In short, if Germany were to exit the Eurozone the other nations would be detrimentally affected, regardless the possibility to revert to Eurobonds.