06 December 2011
The depressing part of this week's narrative is that fiscal union is completely irrelevant to resolving the Euro crisis.
Would fiscal union have prevented the current crisis? A moment's recollection is enough to see that it wouldn't. Spain ran a budget surplus in the three years before the crisis and brought its debt ratio down to 32%. Ireland too ran a surplus and at 25% was well below the Maastricht limits until it took on the debt of its failing banks. Even Italy had its debt on a declining path from around 120% in 1996 to 103% before the crisis.
OK there was Greece, but Greece was prepared to lie and cheat on its national accounts. Ordinary rules cannot catch a determined cheat.
There are two aspects of a fiscal union which could help. One is transfers from stronger countries to weaker ones. The second is a common treasury issuing common bonds. That is why fiscal union works in the US; but both are off the table in the Eurozone.
So why is there a buzz of hope around the Merkozy proposal? The answer is that Signor Draghi dropped a hint that, with a fiscal compact agreed, the ECB might do something. What the ECB needs to do is massive. It has to underwrite the bonds of all Eurozone governments without limit. A suggestion of a possible undefined move doesn't quite fill me with confidence.