Paul De Grauwe of the European Institute at LSE has a cry out for an EU fiscal union over at Project Syndicate. The good news is that he tries to be practical about it. As you might recall, De Grauwe sort of popularized the self-fulfilling prophecy theory for the EU - that namely the fundamental flaw of the EU is that its members issue debt in euros and the euro is a currency that they have no control of.
Thus, none of them can provide any sort of guarantee to their bondholders. A little fear in the markets prompts sell-offs that can lead to liquidity crises and drives these sovereigns closer to default. With not much to play with, they implement austerity programs that exacerbate recessions and lead to further banking crises.
De Grauwe used very simple univariate relationships among debt-to-gdp ratios, credit spreads, austerity, and growth to illustrate this concept. What you expect to observe is strong relationships between austerity and spreads (in 2011) - thus higher spreads -> greater austerity. you can consider the causation both ways here too.
Further, he charts the change in spreads to the initial spreads (to look at the impact of the ECB's announcement), the change in debt-to-gdp vs spreads (a negligible fit), and the usual austerity vs growth and austerity vs increases in debt-to-gdp.
But I digress: the voxeu article is here and the CEPS "Governance of a Fragile Eurozone" can be downloaded here.
To get past this fundamental flaw of the EU - that member nations have no control of the currency in which their debts are issued - debts must be pooled. The immediate response to this, of course, is that's not happening. Germany, for one, is highly unlikely to even look down that path.
Still, De Grauwe mentions the obstacles involved. The first obstacle is naturally that of moral hazard. But there are some more obvious ones such as the willingness of 'stronger' countries to accept inevitably higher interest rates on their own debts with the advent of any sort of joint liability.
To overcome these, he offers the following three:
1) The share of pooled debt must be strictly limited to the extent that each member nation remains largely responsible for a significant portion of their own debt (you can see the grey area already!)
2) An internal transfer mechanism between member nations to counter the "one-way-traffic" argument. Essentially, less credit-worthy countries must compensate their polar counterparts.
3) A supervisory authority to monitor members' progress toward sound public finances and the ability to implement consequences on those that don't adhere (remember the Maastricht treaty anyone?)
Just like the rest of us, de Grauwe understands that a fully fledged fiscal union a la the US is wholly unrealistic. The point is, however, to be practical and begin with really small steps. He emphasizes the need for the EU to convince financial markets that it is there to stay - permanently. And for this to happen, a process must start.
But see, that's the problem. If the process was to start, it would have started. The opposition is far too great and powerful and the false sense of contentment with a kick-the-can approach has manifested itself with the polity that makes decisions. There are factions, there are vested interests and then there are the people.
De Grauwe ends with the Alexander Hamilton narrative - that rather than wait for a political integrating process, he took action that spurred the United States to a full-fledged m-f-p union.
The question is, who on earth is Hamilton here? Rehn? Weidmann? Merkel?
Thus, none of them can provide any sort of guarantee to their bondholders. A little fear in the markets prompts sell-offs that can lead to liquidity crises and drives these sovereigns closer to default. With not much to play with, they implement austerity programs that exacerbate recessions and lead to further banking crises.
De Grauwe used very simple univariate relationships among debt-to-gdp ratios, credit spreads, austerity, and growth to illustrate this concept. What you expect to observe is strong relationships between austerity and spreads (in 2011) - thus higher spreads -> greater austerity. you can consider the causation both ways here too.
Further, he charts the change in spreads to the initial spreads (to look at the impact of the ECB's announcement), the change in debt-to-gdp vs spreads (a negligible fit), and the usual austerity vs growth and austerity vs increases in debt-to-gdp.
But I digress: the voxeu article is here and the CEPS "Governance of a Fragile Eurozone" can be downloaded here.
To get past this fundamental flaw of the EU - that member nations have no control of the currency in which their debts are issued - debts must be pooled. The immediate response to this, of course, is that's not happening. Germany, for one, is highly unlikely to even look down that path.
Still, De Grauwe mentions the obstacles involved. The first obstacle is naturally that of moral hazard. But there are some more obvious ones such as the willingness of 'stronger' countries to accept inevitably higher interest rates on their own debts with the advent of any sort of joint liability.
To overcome these, he offers the following three:
1) The share of pooled debt must be strictly limited to the extent that each member nation remains largely responsible for a significant portion of their own debt (you can see the grey area already!)
2) An internal transfer mechanism between member nations to counter the "one-way-traffic" argument. Essentially, less credit-worthy countries must compensate their polar counterparts.
3) A supervisory authority to monitor members' progress toward sound public finances and the ability to implement consequences on those that don't adhere (remember the Maastricht treaty anyone?)
Just like the rest of us, de Grauwe understands that a fully fledged fiscal union a la the US is wholly unrealistic. The point is, however, to be practical and begin with really small steps. He emphasizes the need for the EU to convince financial markets that it is there to stay - permanently. And for this to happen, a process must start.
But see, that's the problem. If the process was to start, it would have started. The opposition is far too great and powerful and the false sense of contentment with a kick-the-can approach has manifested itself with the polity that makes decisions. There are factions, there are vested interests and then there are the people.
De Grauwe ends with the Alexander Hamilton narrative - that rather than wait for a political integrating process, he took action that spurred the United States to a full-fledged m-f-p union.
The question is, who on earth is Hamilton here? Rehn? Weidmann? Merkel?
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