December 7, 2011
The more things change, the more they stay the same. While European finances and economies crumble, the battle rages on between Europe and nation states.
Witness this week’s Merkozy agreement (for what it is worth, I love that name!).
One of the features of their pact is that there will be no eurobonds. This has been the German line for months now, understandably so. And it seems as though the Chancellor has finally got her way. But so far, it is only agreed by the President and there are 25 more people to convince this week.
Many of those 25 would benefit from eurobonds and a ‘mutualisation’ of their debts. Commissioner Rehn has taken to using this phrase and referencing Alexander Hamilton and the formation of the US dollar and, ultimately, the United States of America. On his side seems to be the new Chair of the ECB Mario Draghi.
This battle, for and against eurobonds, would seem to be there for the taking. There is just one catch, since the euro is in such an egregious state, the winner is almost certainly going to have to pay for the privilege. Whomever is willing to offer the kind of guarantees the market needs will prevail. But time is running out.
While it may still be possible for the Merkozy pact to have sway, they will need to put in place their plan quickly. Of course, their plan lacks time and has a refusal to allow the borrowing needed. To your author, this sounds like a fatal flaw. It also needs agreement from many others as mentioned above. As such, they have to hurry if their view of European finances is to prevail.
On the other side, Draghi has hinted that he is willing to enable more funding via the ECB and likes the idea of eurobonds. The money could actually be required any day in the markets, who knows? Time is very much on his side.
Is there a middle ground to be had?
It is hard to deny that the greater fiscal responsibility being suggested by Merkozy would be good for Europe. Ultimately however, trying to impose that now will prove to be impossible. It will almost certainly also prove to be impossible to bring all 27 member states into agreement on this.
Hand it over
On one extreme, the Germans are quite simply demanding greater accountability and integration. If their view is to prevail, each member state would be financially accountable to the other 26 (or more if Croatia is voted for this week) via a new EU institution that would need to be created for the purpose. This new institution would immediately become one of the most powerful bodies in Europe since the ability of national governments to spend would be scrutinised by it.
For example, this might mean no more ‘buying’ of votes by giving away benefits and concessions in the budget before an election. It would also potentially mean that each budget would need to pass through the EU for approval first before it could be announced. Could you have imagined Gordon Brown doing such a thing…?
It is difficult to imagine these being popular ideas with politicians.
On the other extreme, a mutualisation of debt via eurobonds would make life easier for the financially strapped but spread their debts around amongst everyone else. The rich would be supporting poorer. Perhaps this is actually a ‘socialisation’ of debts?
Either way, this was the first major step towards the formation of the USA and would likely be opposed by anyone even marginally eurosceptic.
No and no
But of course, both options are really creating ‘more Europe’ which will mean that that there will be many both in the Council of Ministers and beyond that dislike the ideas. Both will be politically explosive and some politicians will be able to pick up points with their electorate by refusing anything and everything proposed.
And refuse they will.
Thus, it is difficult to see a scenario where the Merkozy agreement can become a reality. If it can, it is likely that it will be watered down to such an extent as to not do what is really needed. And the problems will continue.
In contrast, if Mr Draghi used the ECB to flood the world with money and ensure that Europe stays afloat while austerity measures kick in continent-wide, he seems to be able to ‘just do it’. This will probably be the ace in the eurobond deck.financialguy