Europe’s Punishment Union
By Ambrose Evans-Pritchard
October 27th, 2011
Very quickly, there has been much loose talk about EU fiscal union. What was agreed at 4AM this morning is nothing of the sort.
It is a “Stability Union”, as Angel Merkel stated in her Bundestag speech. Chalk and cheese.
“Deeper economic integration” is for one purpose only, to “police” budgets and punish sinners.
It is about “rigorous surveillance” (point 24 of the statement) and “discipline” (25), laws enforcing “balanced budgets” (26), and prior vetting of budgets by EU police before elected parliaments have voted (26).
This certainly makes sense if you want to run a half-baked currency union. As the statement says, EMU’s leaders have learned the lesson of a decade of self-delusion. “Today no government can afford to underestimate the possible impact of public debts or housing bubbles in another eurozone country on its own economy.”
But none of this is fiscal union. There is no joint bond issuance, no move to an EU treasury, no joint budgets with shared taxation and spending, no debt pooling, and no system of permanent fiscal transfers. Nor can there be without breaching a specific prohibition by Germany’s top court, a prohibition that could be overcome only by changing the Grundgesetz and holding a referendum.
(Yes, you could argue that leveraging the EFSF bail-out fund to €1 trillion with “first loss” insurance of Club Med debt implies a massive German-Dutch-Austrian-Finnish-Estonian-Slovak transfer one day to the South. But again, is that really a fiscal union? Mrs Merkel says this money will never be needed because the mere pledge will restore market confidence.)
As Sir John Major wrote this morning in the FT, this does not solve EMU’s fundamental problem, which is the 30pc gap in competitiveness between North and South, and Germany’s colossal intra-EMU trade surplus at the expense of Club Med deficit states.