In its lead article, the Economist says that the recent EU summit was “A comedy of euros.”
Once again Europe’s leaders have failed to solve the euro crisis. The new treaty could easily be killed by the markets or by its rejection in one or more euro-zone country. The EU has suffered plenty of disappointing summits without the sky falling in—a good many of them in the past year. But unlike the marathon dispute over a new constitution, the euro is in a race against time because markets are pushing countries to insolvency. As investors and voters lose faith, the task of saving the single currency grows harder. Sooner or later, the euro will be beyond saving.
[...] [The Eurozone's] members could strike a grand bargain that deploys the ECB’s balance-sheet and some form of Eurobond in exchange for fiscal integration. The question is not whether they can save the currency, but whether enough of them are prepared to pay the price. This summit suggests not.
Elsewhere in the December 17 issue:
- “The European Union and the euro: Game, set and mismatch” — What do you get when you mix political differences and inept diplomacy? Britain’s bust-up with the rest of the EU.
- “The Euro crisis: Damned with faint plans” – Euro-zone government bonds have not been made safe—and the euro project remains in peril.
- “European banks: Staggering to the rescue” — Europe’s troubled banks and broke governments are in a dangerous embrace.
- “Economics focus: One nation overdrawn” — Lessons for Europe from America’s history
- “The coalition after the veto: State of the union” — Nick Clegg and David Cameron, and the parties they lead, are deeply divided over Europe. But the coalition is indissoluble for now.
- “Financial services in Britain: The blitz spirit” — Britain’s banks face a battalion of threats, not all of them foreign.
- “Bagehot: How Britain could leave Europe” — British grumpiness about the EU feels familiar; actually, big new dangers lurk.
“Economics focus: One nation overdrawn” provides some interesting links:
- Michael Bordo, “The United States as a Monetary Union and the Euro: A Historical Perspective” (2004)
Our historical perspective leads to the conclusion that Europe achieved monetary union much more rapidly than did the United States but that integration on the real side, especially in the labor market, which ultimately is what is required for the EMU project to be successful, has lagged way behind. The question then arises, will the necessary real side reforms required to foster greater flexibility occur at a pace that will come into play in the face of the vicissitudes of the world business cycle and changing world patterns of activity? Will political will continue to provide the glue to keep the EMU going in the face of slow integration? Will it take the equivalent of the U.S. Civil War to either destroy it or strengthen it? Or will institutional adaptation occur in a learning-by-doing process?. Will adding on 10 new countries to the EMU at much lower levels of economic development help the project like the Louisiana Purchase and the Mexican War did for the United States or will it be like the counter factual exercise of the United States acquiring Mexico and Central America? The historic events basically allowed the United States to expand its territory, provide land for new settlers, and acquire vast resources. The counterfactual exercise would involve adding on a densely populated, culturally different region, at a much lower stage of economic development.
The evidence so far suggests that the best case scenario is guarded optimism. A more likely outcome based on the European response to the recent world downturn is probably not so rosy.
- Michael Bordo et. al., “A fiscal union for the euro: Some lessons from history” (2011)
The history of fiscal federations provides us with a number of conditions necessary for a fiscal union to function smoothly and successfully and thus also the monetary union on which the fiscal union is based. The first and probably the most important condition is a credible commitment to a no-bailout rule for the members of the fiscal union. The second one is a degree of revenue and expenditure independence of the members of the fiscal union reflecting their political preferences. The third condition is a well-developed transfer mechanism to be used in episodes of distress. This transfer mechanism can be facilitated by the establishment of a common bond. The fourth condition is a capacity to learn from past mistakes and adapt to new economic and political circumstances.
The Eurozone was created without an effective fiscal union. The institutions that were established to serve as the foundation for the fiscal union (the Maastricht Treaty and the Stability and Growth Pact) – to discipline domestic fiscal policies – did not function as planned as revealed by the crises and recession from 2007-2009 and onwards. The lessons from the historical experience of the five federal states surveyed by us could be helpful for the Eurozone to avoid disintegration.