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A halfway house to fiscal union in the EU

EU economy | A half way house to fiscal union in the EU Anthony Harrington

Anyone who thinks that the key figures behind the Eurozone, from heads of state, to finance ministers, to the head of the European Central Bank (ECB) are not giving thought to ways and means for getting beyond the EU’s rolling sovereign debt crisis, is dreaming. The obvious answer, standing out like the proverbial elephant in the room, is to move to full fiscal union. However, that, it seems, is not politically doable.

If we had full fiscal union in Europe then one would expect fund transfers from strong parts of Europe to the weaker parts of Europe and a levelling of the playing field. Ultimately the benefits would be that Europe would be able to get away from stumbling from one sovereign debt crisis to the next and would be able to compete head to head with North America and Asia Pacific. Where exactly full fiscal union would leave individual nations and their sense of themselves, is, of course, somewhat challenging. One suspects that the French would not be any less French, the Germans less German or the English less English, but the proof of the pudding is in the eating, and curiously, no one is prepared to sit down to this particular dish, not even the Portuguese or the Irish – neither of whom are in much of a position to tell the EU to go hang.

In the absence of viable fiscal union, other alternatives must be found.  According to the Head of the ECB, Jean-Claude Trichet, there is another obvious, and much more doable solution. Giving the keynote address at the European Banking Conference in Frankfurt am Main on November 19 Trichet pinpointed the “triangle that provides the perimeter of the current situation” as a) unsound fiscal policies in some member states, b) inappropriate macro economic policies in some member states and c) a near total failure of oversight or surveillance by all member states. The solution is quite simply to reverse all of these.

Now this, at one level, is a bit like saying that the cure for evil in the world is for everyone to be good. True, but trite, and it ain’t ever going to happen, especially if your good isn’t my good. However, on the assumption that we all know sound fiscal and macro economic policies when we see them – a slightly dodgy assumption given the complexity of the world and the differences in perspective that stem from being located in London rather than in Brussels, or Paris rather than Bonn – the key leg in Trichet’s three legged stool is undoubtedly surveillance, the overwatch of all by all.

In his speech Trichet makes it clear that the ECB is calling for “a very ambitious reform of euro area governance – a reform that will address the root causes of the current situation and make it simply impossible (for it) to happen again.”

This said, Trichet proceeds to consider the one pan-European oversight body the EU has managed to create, the European Systemic Risk Board (ESRB), which he also chairs. If one takes the thrust of his analysis to be the requirement for a pan-European body that can basically slap down a member state whose budget flouts prudence or macro economic sense in some way or another, it has to be doubtful that the embryonic ESRB would have the guns for this.

The ESRB would seem to be, on the face of it, much more likely to be able to squash a dodgy pan-European trend, such as a sudden lust for wobbly derivatives plays, than to be able to stand like a lion in the path of a duly elected European government intent on pushing through a budget of their own choosing. Trichet, however, gamely argues that the ESRB will be “a landmark event in how Europe deals preventively with systemic risk”.

Its main tools will be “warnings and recommendations”. “Where appropriate it will complement warnings with recommendations for remedial action and indications of the risks of inaction. We assume that the addressees will give careful consideration to the measures the ESRB will propose,” Trichet tells his audience of bankers.  Maybe they will listen, and maybe they won’t. However, it seems that the ESRB is going to be the closest thing we will get to a half way house to fiscal union.

Further reading on regulation and the EU economy:

Tags: ESRB , EU , European Systemic Risk Board , fiscal union , half-way house , Jean-Claude Trichet , regulation
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