eurobonds-fiscal-unionIt’s been a while since Debating Europe focused specifically on the Eurozone crisis, and events have been moving quickly. We recently put up a post on banking and financial reforms (and will be publishing a follow-up to that shortly) but now is perhaps the time to turn more generally to the “permanent crisis” that has become the “new normal” for Europe. How many more late-night meetings and last-minute deals before we have a solution?

Yesterday, after yet another grueling 14-hour meeting, Eurozone finance ministers and private lenders agreed on a second round of emergency loans for cash-strapped Greece. A new “fiscal compact” is expected to be signed by the majority of member-states in March (though, due to last year’s UK veto, this will be a treaty signed outside the official EU framework). The new treaty is aimed at strengthening the rules for fiscal oversight in the Eurozone, but critics argue that further measures will be needed to ensure long-term growth.

Last year, reader Paul sent in the following comment:

The solution to the eurozone is, at this moment, the only thing that is important.  This needs to be sorted out and any distraction has to be blocked.

Recently, we spoke to Lorenzo Codogno, Director General of Economic and Financial Analysis and Planning for Italy’s Ministry of Economy and Finance. We asked him if, since Paul left his comment in December of last year, a solution had finally been found.


My impression is that, yes, we have a solution. It’s not necessarily a permanent solution, but at least it addresses the issues raised by financial markets over the last couple of years. The ECB has been particularly effective, and the liquidity crisis that many banks have been facing is basically over. There’s still a solvency issue for many banks, but the issue is not immediately seen as particularly damaging. So, effectively, for the banking side, some of the problems have been resolved.

On the sovereign side, there is good news in some countries. I cannot emphasise enough that we in Italy have seen a positive change, which came on top of the policies of the previous government; but also in Spain and Portugal, the correct policy response is there. I’m not a particular fan of the so-called fiscal compact, but a number of solutions have been developed over the last few months, in terms of directives, the six-pack, and so on. We have a framework going forwards.

You say the fiscal compact is not a permanent solution, and many of our readers would agree with you. We’ve had comments sent in (for example, from Protesilaos, Stanislav and Christos) arguing that only a true “fiscal union” - with integrated fiscal policies and possibly a common Eurozone finance minister – will ultimately be able to overcome the crisis. Others, such as Marcel, argue that a fiscal union would be unacceptable to voters and thus a “catastrophe” for democracy. Who would you agree with? Do we need to move towards full fiscal union to finally achieve a solution?

I would agree with that. I fully understand that, particularly in some countries, there are certain sensitivities. Some steps would be perceived as far too much by voters, risking a political-social backlash in certain countries, which is something we need to avoid. However, some politicians would probably be better off being the driver of change rather than relying on what the voters say, whilst in other countries the voters are definitely not prepared to move immediately towards fiscal integration.

Some countries want to have commitments – and proof – that other countries are doing what they must to reduce their debt. Hopefully, once this process is set, and we see tangible results in terms of debt-to-GDP in some countries, and we have an established trend of good news, I think more countries could be more relaxed and much more proactive and accept much stronger integration in Europe than what is currently feasible. I would definitely argue in favour of that, and I’m sure we are heading towards that solution eventually. The problems we are facing will remain until we are at the point where there is only one country in Europe, and until then there will be still be risks around.

What do YOU think? Has a permanent solution to the Eurozone crisis been found? Will the “fiscal compact” be enough to satisfy markets that discipline has been achieved? Or do further steps need to be taken towards fiscal union and “one country in Europe”? Let us know your thoughts and comments on the fiscal compact and possible solutions to the crisis in the form below, and we’ll take them to policy-makers and experts for their reaction.

IMAGE CREDITS: CC / Flickr – mammal

14 comments Post a commentComment


  1. Rainer Saad

    I think if you regulate economies and markets too much, it is not free-market economy anymore. Eurozone countries are different and if you just put them all under one hat could mean that it is favoring few and disfavor many. Once again I believe governments have intervened to capitalist system.

  2. Jakub Zelazny

    @NMM: Yup, it was them allright, euro was brought to life to stabilize their export by elimininating currency fluctuations. In times of crisis, it chokes poorer countries, and strengthens the stronger, what causes relocating political power north. Its not an economical tool, it a tool designed for centralisation.
    We must stand unite.. against forcefull unification!

  3. Rainer Saad

    Hello,

    I think even now it is uncertain how eurozone is going to look like in next years. Bail Greece out twice (maybe 3rd, 4t and so on), Portugal has risk to become insolvent, we don’t know how cuts affect Italy and Spain. It could be zero-sum game if you cut too much.

    European Union was meant to integrate countries and now it is the monetary union that is tearing Europe apart.

    I don’t think there is one solution for all problems, because it is two-speed eurozone.

  4. Michael Tsikalakis

    Greece is an “experiment” European Member State or/and an example to the other member states. Political unification is forced through financial unification first. This is the permanent solution. Eventually, I think that this is the only way. The question is “are we compromising people’s democratic rights or do we have to follow Machiavelli’s theory?” Suggestions can be addressed from “experts” who know exactly what is really going on. I am not an expert but my feeling is that all these are not the main point of the story.

  5. Tamás Rózsás

    Greece’s problem is not a euro problem, I recommend the article in my previous note from a Greek author. Long time Greek government inefficiency is the real reason. Do not misunderstend me, I am not blaming the average Greek citizen and this is not only holds for Greece. I am a Hungarian, I know what kind of crazy policy decisions were going on in these countries for decades.

  6. Tamás Rózsás

    Regarding the solition, I believe there are solutions but nobody really works on them because they are politically sensitive. A lasting solution would be to go back to the original goals behind the EU: tear down economic borders and obstacles to a common European market and let people vote with their feets when they see stupid policymaking at home. That would put a limit to government failure and make Europe more competitive.

  7. Tamás Rózsás

    Noel, Bsically I agree with you on the euro but this SS thing was a little strong for me. I think Germans and French only want to trade. They are only more fond of big governmet that you and I, I belive :-)

  8. Christos Mouzeviris

    well definitely not by throwing more debt with bail outs to the weakest links of the eurozone..!! they will never be able to repay their debts!! this is not the solution…not a permanent one anyway…if another crisis comes again in a decade or two, we are going to have start all over from the beginning…unless we make permanent structural reforms we are going to go in circles…

    besides, it is unfair to ask only the weakest links to suffer and pay up…even the “big players” broke the rules, but their citizens do not have to suffer as much…

  9. Leonardo Baggiani

    the last plan sees Greece as completely under external control; even separate accounts are requested to externally manage the payment of interests (two years ago I wrote this end on a e-newspaper). The issuing of new bonds, longer and with lower interest rates, means a net present loss higher than 75% for creditors: yeah, if you have lent money to the wrong guy, you must suffer the consequences. But free market would have reached this solution at least two years ago with a net present loss of about 30%, which means that all political efforts in the meanwhile have produced no solutions but further wealth losses or transfers (EBC buying bonds from banks means sparing them the due loss, for it to be paid by tax-payers). The other agreements provided are all ways to distribute part of the gigantic loss of this fallacious political management of a fiscal crisis.

    Is this a solution? In a sense, so: Greece, you have lost fiscal sovereignity. And for the rest of Europe? No solutions provided, governments have still free hand to spend ’till markets stop and reverse their flows (in the case, Governments know that ECB, EFSF and so on with letters, will offer help for some time and losses will be paid only at the very end of all options).

    Methink Greece has been an experiment too. It failed.

    btw: fun, ISDA has classified the solution as not a trigger event, no default, so big banks won’t pay for issued CDS ah ah ah here we see the difference between speculators (who bought CDS) and big banks, and who rules the markets.

  10. Bill Rollinson

    “Some countries want to have commitments – and proof – that other countries are doing what they must to reduce their debt. Hopefully, once this process is set, and we see tangible results in terms of debt-to-GDP in some countries, and we have an established trend of good news, I think more countries could be more relaxed and much more proactive and accept much stronger integration in Europe than what is currently feasible.”

    This will take far too long (years) to reach and in the mean time markets get restless, all across Europe the job market has been marking time waiting for decisions on Greece and people go hungry. As Leonardo Baggiani say’s above, this is an experiment failed! We want no more, it’s about time all social experiments ceased and Southern European countries went back to their original currency. At least then they will be able to devalue to survive instead of relying on the TAX-PAYER to refund the banks!

  11. Bastian

    The current suffering of Greece is totally linked with the construction oft the EU and the mentality of it s power holders. It cries out for political responsibility. The first circle of people responsible for the misery of Greece sit in (A) the EU Commission, because it is the Commission which reviews and suggests who meets the conditions for membership and enlargement. The second group of individuals responsible belong to (B) the EU Council, because it makes the decisions about membership. The EU Council is more or less identical with (C) the head of Member States. A third group of people are (D) the big players in the financial markets, because they provided Greece with financial resources knowing that Greece will never be able to pay that back. However, the main political responsibility is with the first two groups, a circle of people which probably counts less than 50. The least guilty are (E) the people of Greece, although for one decade they have consumed far beyond their productivity, all this was made possible by their political class and the rotten design of the EU. Finally, the consequences of this EU deceit for (E) us in the wealth creating north and centre countries of Europe is, that we are bereaved of the fruits of our work with the deceitful argument of “necessary EU solidarity”. #

    We don’t need another fiscal treaty or institutions like the ESM but a complete redesign of the EU, something where those who make decisions without democratic legitimation must take on a personal responsibility.

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