Germany's Fiscal union with a capital F


So what are the hurdles that the eurozone leaders were trying to overcome?

The missing details in last night's statement from eurozone leaders have been much discussed. But we know two key things today that we didn't know at the start of this week. One is short-term, but welcome. The other is very long-term, and will be troubling to some.

The first thing we have learned is that the European Central Bank will remain in a position to buy the government debt of countries like Italy and Spain, even now the enhanced rescue facility, the EFSF, has been ratified.

True, we only know this because Mario Draghi, the incoming head of the central bank, said so - not because of anything agreed by the heads. And we don't actually know that the purchases will continue - for example, when the EFSF wins all that extra leverage it is supposed to be getting - only that they could.

Bond purchases continue

But even a few weeks ago, ECB officials were talking privately about completely shutting down the bond purchasing programme, the moment the 21 July agreement on enhancing the EFSF was ratified - ie now.

Nearly everyone thought that would be deeply counterproductive, if not downright dangerous, because when it comes to serious firepower, the ECB is still the only game in town. So, we should be thankful that is not going to happen.

Second, and most important, we know that the Eurozone is on a path towards fiscal union - and it will indeed be Fiscal union with a capital F.

All the talk about closer coordination and surveillance in the statement comes down to one thing: more centralised control of national budgets and tax policy.

Mervyn King and others who have highlighted the issue of current account imbalances, inside and outside the eurozone, will look in vain for any mention of them in this agreement.

Or the great risks and cross-border financial transfers that such imbalances bring. Where the word competitiveness is used, even that is followed by further talk of national tax regimes and the need to co-ordinate them.

It's entirely fiscal

The closer union described in this agreement is one in which public imbalances are the only imbalances that count, and the only problem with the old Stability and Growth Pact was that countries did not stick to it.

If you read only this statement, you would be surprised to hear that Spain and Ireland first violated the Stability and Growth pact only in 2008 - a year in which France and Denmark, among others, also broke the 3% target for government borrowing.

Their excesses were private, not public. It was only when the crisis hit that they became the government's problem, as these imbalances always do.

Put it another way: the closer union described in this agreement is the union that Germany wants. There is no symmetry between net creditor countries and net debtors, and it really is entirely fiscal.

I said this statement told us the eurozone was on the road to fiscal union. Of course, whether it stays on that road is another matter. As I highlighted on the 10 o'clock news last night (see video above) - and in my past two posts - economic growth will largely determine whether they stay on that path.

Last night's deal has a lot to say about where growth is going to come from in the long run - when countries like Greece and Spain have achieved the wrenching public and private adjustments they need to make. Where it is going to come from in the short run remains unclear.

Outside Germany, "fiscal union" has increasingly been code for "getting hold of Germany's money". Inside Germany, it means having the power to make sure other members never overspend again.

It's just one of the areas of disconnect that has made this crisis so exciting. But non-Germans reading this statement should be in no doubt as to which version of fiscal union they are signing up to.

Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this

    Comment number 10.

    Suggesting that countries were overspending is only a partial truth. The gambling of the banks with the money caused the collapse. Gambling sounds better than criminal activities although that is what it was.Those very banks and their rating agencies were telling the governments it was OK to borrow more.Germany knows the bankers can't be trusted and want to monitor how they get their money back.

  • rate this

    Comment number 9.

    The ECB's firepower is far from enough unless they are allowed to print money.

    Printing money leads to inflation and can reduce real growth especially if it's mostly prices rising, not salaries, so consumers buy less (just like we see in the UK).

    Germans still remember hyperinflation during the Weimar Republic (leading to the rise of Nazism) so they're against money printing by the ECB.

  • rate this

    Comment number 8.


    If the ECB needs to raise capital it asks eurozone governments to provide it. This is outside EFSF or any of the other special instruments. The call for capital is joint & several so if a country cannot pay the others must pay more.

    This is what will lead to disaster in a year or two as only a handful of sovereigns will be in a position to reluctantly pay.

  • rate this

    Comment number 7.

    "when it comes to serious firepower, the ECB is still the only game in town."

    This needs explaining.

    The ECB has been propping up bond markets by purchasing huge amounts, and Steph's information is that this will continue. If these bonds have a voluntary haircut or a default the ECB makes a loss. It is probably already technically insolvent.

    What happens if it is insolvent?


  • rate this

    Comment number 6.

    It is only after you have caught
    and skinned your rabbit, can you be
    sure of making a profit. Only time (3 to 6 months) will tell.

  • rate this

    Comment number 5.

    Just how will the Euro zone countries monitor and possibly veto each others budget setting decisions and what statutory force will such a mechanism have rooted in the 'constitution' of the EU (assuming the Euro zone does not develop its own constitution that overrides the EU's).

  • rate this

    Comment number 4.

    Germany was a basket case after the east & west merged, but it handled the problem & muddled through.

    The risk to the UK is being sidelined economically & politically with a fluctuating currency that dissuades foreigners from buying our goods or investing here. Osborne MUST take this on board and fix sterling to the Euro as a prelude fro adopting the Euro here or we are economically doomed.

  • rate this

    Comment number 3.

    "when countries like Greece and Spain have achieved the wrenching public and private adjustments they need to make" & what result will that produce - modern dynamic economy growing at 3 to 4%. I dont think so it is more likely to make the problem even worse unless the E/zone do implement some sort of positive Marshall plan style programme. Just what mechanism will shape the budgets of Greece etc.

  • rate this

    Comment number 2.

    So, Greece needs to come-up with some trendy use for Olive Oil, just like Magners transformed cider drinking...

    or maybe call in the Aussies and get them to teach the Greeks how to make wine?

    Metaxa anyone?

  • rate this

    Comment number 1.

    German success is due to growth of negative entropy (in AI terms, "learning"), not manufacturing. It is a learning economy. In contrast, southern Europe is under-developed and isn't learning.

    Southern Europe now seems the perfect place to test Paul Romer's charter cities. Didn't someone once say "it's the growth, stupid".


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