Can the eurozone be saved?
- 15 August 2011
- From the section Business
George Osborne, George Soros, some eurozone leaders and many economists (if you think their views are still worth hearing) argue that the eurozone's salvation requires the adoption of a fiscal policy of "all for one, and one for all".
The expression of that policy would be so-called euro bonds, or debt issued by the eurozone that would be a joint and several liability of all member states.
Or to put it another way, the eurozone would borrow as a single entity, with the responsibility for repaying the debt falling on all member states; and thus there would be a single interest rate for the eurozone as a de facto sovereign body, rather than separate borrowing costs for Germany, France, Italy, Belgium and so on.
Here is the argument for the necessity of creating the euro bond, of Mr Soros, the legendary hedge-fund trader credited with triggering the collapse of the eurozone's precursor, the European Exchange Rate Mechanism, in an interview with Der Spiegel:
"The euro exists, and if it broke apart all hell would break loose. Germany has to make it work.
"To make it work, you have got to allow the members of the euro zone to be able to refinance the bulk of their debt on reasonable terms.
"So you need this dirty word, the "euro bonds". But when you study what it involves to have euro bonds, you really have a problem because each European country remains in control of its own fiscal policy, and you have to rely on the country to meet its financial obligations."
I had better translate.
Mr Soros is saying two things. First, that unless and until Germany - Europe's largest economy with its rock-solid balance sheet - stands behind the debts of all eurozone members, the currency union will career from crisis to crisis, because investors and creditors are demanding that over-indebted member states pay penal interest rates when they borrow on the basis of their respective balance sheets and prospects.
The implication is that the European Central Bank can temporarily reduce that penal interest rate, by buying member state's debt - as it did for Spanish and Italian debt last week. But this would not be a permanent solution.
The second point made by Mr Soros is that it would be impossible for the eurozone to issue euro bonds while individual member states retain enormous fiscal discretion - while they have the ability to spend, set taxes and borrow as they please.
Or to sum up - in a way that is very similar to what the British Chancellor of the Exchequer has been saying - the survival of the eurozone requires tax and spending policy for all eurozone members to be determined centrally, by a eurozone super finance ministry.
The necessity of what George Osborne calls fiscal integration is simply that Germany will not allow its citizens' taxes to be put at risk to help Italy, Spain, Portugal and the rest to borrow more cheaply unless those countries manage their affairs in a more prudent way, such that the liability for Germany becomes more notional than real.
This point was expressed succinctly yesterday by Germany's Federal Minister of Finance Wolfgang Schaeuble, again in Der Spiegel:
"I rule out euro bonds for as a long as member states conduct their own financial policies and need different rates of interest in order that there are possible incentives and sanctions to enforce fiscal solidity."
So, although Mr Schaeuble is viewed as an opponent of the euro bond idea, that is not a "no, nay, never" from Germany. It is a conditional yes.
But meeting that condition will be ferociously difficult - which is why the French and German governments have been briefing that tomorrow's summit between the German chancellor, Angela Merkel, and the French president, Nicolas Sarkozy, won't presage rapid progress towards the launch of euro bonds.
Surrender or disaster
Let's just think for a second what is entailed by the kind of fiscal integration required to make a practical reality of euro bonds.
There would be a permanent surrender by member states of important rights over how much they could raise in tax and spend on public services. The new decision-making body would probably have to be some kind of finance ministry - which would presumably be in Brussels - for the whole of the eurozone, which would be headed by a European uber finance minister.
So the tax-and-spending relationship between - say - the French government and the new eurozone super finance ministry would be similar to the relationship between the Scottish and Welsh governments and HM Treasury.
Quite apart from the serious practical and technical challenges of establishing this new fiscal decision-making body for the eurozone, it is not at all clear that the citizens of eurozone countries would feel comfortable about even greater distance being put between their votes and decisions that have a direct impact on their quality of life and prosperity.
It is difficult to see how eurozone fiscal integration designed to close a financial deficit can be achieved without enlarging Europe's democratic deficit.
And then there is the question of whether a new eurozone finance ministry would insist that all eurozone economies were run on German lines - viz on the basis of relatively low consumption, high current-account surpluses and balanced public-sector budgets.
Because the period of transition to the Germanization of Europe would probably condemn Spain, Italy and even France to years of painfully low growth at best, and endemic recessions at worst.
But the problem for Germany is that if it were not to demand credible institutionalised prudence on the part of other member states, Germany would (almost inevitably) be stripped of its AAA credit rating just as soon as a euro bond became a German liability - and that would be a humiliation that German voters would probably not tolerate.
All of which is to say that if you believe fiscal integration is the sine qua non of saving the eurozone, then you might conclude that the eurozone can't be saved.
Except for one thing. Europe's people might conclude that surrendering control of tax, spending and borrowing powers is a hideous prospect, but the alternative - a collapse of the eurozone - might be worse.
Always one for a resonant phrase, this is how Mr Soros puts it:
"If the euro were to break up, it would cause a banking crisis that would be totally outside the control of the financial authorities.
"So it would push not only Germany, not only Europe, but the whole world into conditions very reminiscent of the Great Depression in the 1930s, which was also caused by a banking crisis that was out of control."
If you agree with Mr Soros, the choice for the eurozone is between the surrender of some national sovereignty and economic disaster - a disaster that would impoverish the eurozone and the rest of us.