Germany's Fiscal union with a capital F

  • 27 October 2011
  • From the section Business
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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.