UBS, the Swiss-based financial services company, recently published an analysis of the likely final outcome of the Eurozone crisis. They predicted “with an overwhelming probability” that the Euro would move towards some kind of fiscal integration. On the other hand, the chances of a break-up of the Euro is, according to UBS and economist Paul Donovan, “close to zero probability”. Slightly terrifying is their analysis of the risks of break-up:
It is also worth observing that almost no modern fiat currency monetary unions have broken up without some form of authoritarian or military government, or civil war.
Closer fiscal union could mean closer coordination of taxation and spending limits between European governments. It could mean a common “Eurobond” or even a single “European Finance Minister”. There are various suggestions on the table, some more radical than others. We recently spoke to Peter Spiegel, the Brussels bureau chief of the Financial Times, and presented some of the ideas from Debating Europe users for his reaction.
First up, what about the suggestion of massively expanding the European “bail-out” mechanism and allow it to buy up bonds in the secondary market? This was a suggestion from Brugel in our forum.
I think that is a workable and likely solution to what’s going on right now. I think what all the financial markets are looking for is a lender of last resort. If you’re a holder of bonds, the ECB clearly does not want to be the lender of last resort – and in it’s charter it can’t be. If the European Finacial Stability Facility (EFSF) was expanded and allowed to be exactly that and jump into the secondary bond markets, I think that’s a very workable solution. It’s a positive idea.
What about the idea of launching a common Eurozone bond? Possibly used to finance some kind of “new Marshal plan” to grow Europe’s economy out of crisis? We had a suggestion along these lines from Slazia and also recently from Paul Odtaa. Here’s Peter Spiegel’s view:
I’ve yet to form my opinion. Of the people I’ve talked to who are advocating this, they argue that levels of debt in the eurozone are 88% to GDP, and that compares very favouarably to the US and Japan. If you pull it all together, you get a safehaven and a lot of liquidity. Look at the dollar: even though there’s been this horrible self-inflicted wound with the fight over raising the debt limit in the US, it’s still a safehaven. If you get a common Eurozone bond, I think it helps everyone. However, I’m not sure Germany would be willing to pay more. So I’m not sure it’s politically workable.
So increasing the “bail-out” fund is going to be more politically workable than introducing a common Eurobond?
The only thing holding back increasing the size of the EFSF is the worry about what that would mean for the debt rating of certain member-states. The guarantee from Germany and France, for example, gets counted against their national debt rating.
What do YOU think? Do you agree with Peter Spiegel that having a “lender of last resort” for the Eurozone is more workable than a common Eurobond? Do you have other ideas for fiscal union in Europe that you can suggest? Or perhaps you believe the opposite, that “less Europe” is the answer to the crisis? Let us know in the form below.
Peter Spiegel is the Financial Times’ Brussels bureau chief. He first joined the FT in 1999 and has also written for the Wall Street Journal and the Los Angeles Times.