06 December 2011

Getting Fiscal

Flash, I love you but we only have three days to save the Euro.

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.

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