Fiscal union in Europe ..... a pipedream in its death throes

Wednesday 22nd April 2015

Fiscal union in Europe ..... a pipedream in its death throes

"Economic crisis and QE ring the death knell for fiscal union in Europe" , The Times, p.39

People forget very quickly. The Eurozone has been fudging the fiscal guidelines required for monetary union almost since the euro's inception, and we're not just talking about the poorer, southern member states here. The first two nations to break the rules regarding deficits not exceeding 3% of GDP were Germany and France, but as ever those nations had enough political clout within the EU to avert any sanction. A precedent was set that remains, sceptics would argue, a fundamental flaw of the common currency.

From today's vantage point, it's easy to see how some of the difficulties of monetary union can develop crisis proportions. Was it ever reasonable to believe that similar borrowing rates for Germany and say Greece (to pick two countries at random from the hat, of course!) wouldn't cause serious problems further down the line? Is it even possible to achieve secure monetary union without at least a largely coordinated fiscal policy amongst members? Clearly Angela Merkel thought not three years ago when she called for "more joint budget policy", although she wouldn't repeat it now. Bank of England Governor Mark Carney was told to keep his nose out of it when he suggested something similar.

Fiscal integration requires political integration, and therein lies the problem..... appetites change. For all the idealistic noises  still occasionally to be heard from Brussels, the evidence from member states suggests a desire for greater sovereignty rather than less. Certainly the idea of sharing risks across the Eurozone holds no attraction whatsoever, which is why those nations prefer to issue their own sovereign bonds rather than participate in Eurobonds that would pool such risk.

Unsurprisingly there are calls for tougher membership rules but as we've seen, the EU's record on enforcing such rules is pretty dismal and does not inspire confidence.