Nicolas Veron of Bruegel Thinktank (Europe’s Fiscal Union Still Lacks a Blueprint) is on the same line as many of my previous postings: the piecemeal approach by EU policymakers to addressing one problem in the Eurozone at a time – and the hesitant and half-hearted solutions they can (partially) agree on – with its overriding tenet that the sacrosanct status of the European Treaties must not be called into question does risk the viability of the Eurozone.
Greece’s problems have been discussed and negotiated for nearly two years: the fate of Greek bonds and those of other Euro members which have been downgraded by the rating agencies has shaken the important belief that Eurozone government bonds are absolutely safe and will be redeemed at 100%. Since banks holding government bonds did not have to underpin them with equity (“100% risk-free assets”), their downgrade requires banks to put up more equity which they neither have nor can easily acquire. This might endanger the whole Eurozone project by hollowing out the EU bond markets. The country-by-country approach to solving this must fail. The ECB’s liquidity shower will partially go to non-viable banks and prop them up for some time. There is only one solution, to create a veritable “fiscal union” where Eurozone bonds are guaranteed by all member countries; otherwise the differentiation, the lack of an anchor and the continuing downgrading will destroy the Eurozone. Without a fiscal union with joint bond-issuing powers and with the supreme Eurozone tax and budget authority, ECB’s valiant attempts to circumvent the treaty paragraphs will be in vain, but still expensive for Eurozone taxpayers.
Equally, it does not do to recapitalize and save banks country-by-country. The banks are heavily interlinked and thus need Eurozone-wide regulations and crisis resolution schemes. Non-viable banks need to be wound down, viable ones obtain the necessary capital buffers. At present, when they are all attempting to rescue their weak balance sheets, all ECB money is hoarded, each bank is trying to save itself – at the expense of a stable and viable banking system in the future. Again, a true fiscal union is needed.
While the ECB 3-year liquidity injection postpones the more needed actions and selection process of banks, it has not led to higher lending. There is a European credit crunch in place. This is reinforced by the banks, the governments, businesses and households’ attempts at repairing their own balance sheets which leads to further retrenchments and recession. When all sectors of the economy consolidate, i.e. save more than they spend, total income and demand fall, the economy shrinks. To export one’s way out of this situation is not possible, because everybody else consolidates.
Policymakers need to “look outside the box”, outside the straitjacket of the European Treaties. These have proven inadequate for the governance of the Eurozone. While politically difficult to change, this is an absolute must.
The objective must not be “what is possible within the Treaty”, but “what is necessary in order to safeguard the viability of the Euro project”, in short, the establishment of a true Fiscal Union. From an accountability and democracy-point-of-view the establishment of a European Fiscal Authority will require democratic legitimacy. Only if the European populations can call European institutions to full account, will they be willing to transfer sovereignty rights from their national parliaments to Europe. Many proposals at a European democratization have been put forward: from a direct election of the EU presidency, the combining of national and EU parliaments, the European referendum, to streamlining the representation layers in EU countries to two only (EU level and regional level), and many more.
The present tunnel vision of EU policymakers which is constrained by the Treaty needs to be widened towards the essential goal of saving the Euro project.