Last week’s interview with Peter Spiegel of the Financial Times on the possibility of introducing some form of common Eurobond as a solution to the ongoing EU debt crisis has drawn several interesting reactions from readers. One came from prolific Greek Euroblogger Protesilaos, who argued that “Eurobonds” are not quite the same thing as “fiscal union”. Protesilaos argued that Eurobonds would, ultimately, need to be backed up with genuine fiscal union.
It seems to me that we all make mention of a “fiscal union” yet we are referring to something else… The discussion on the matter centers around fiscal discipline and mechanisms / ways of enforcing / achieving stricter fiscal rules. I am afraid to say that this is not a fiscal union, this is only a Stability and Growth Pact with an expanded scope of application.
A real fiscal union implies fiscal transfers, a surplus recycling mechanism, a unified banking sector, a treasury. Take the treasury as an example… how much should Spain contribute to it, how much Greece, France, Germany etc? This is not an easy thing to decide and by the time it is, the euro will belong to history. Similarly for all other issues relating to a fiscal union. The point is that it is not just about common fiscal rules – “discipline”. Of course we need common rules and of course we need a fiscal union in its proper sense, but this means that surplus countries will stop being as “surplus” as they are, for their surpluses will be transferred to deficit regions to achieve balanced growth and convergence.
We took this comment to Daniel Dăianu, former liberal Member of the European Parliament (2007-2009) and Finance Minister of Romania (1997-1998), for his reaction. As you can see below, he strongly agreed with Protesilaos.
Fundamentally, I’m in favour of issuing eurobonds. However, my reading of the crisis is that just imposing stronger fiscal rules and debt breaks is quite insufficient. And this is not related to the current state of the Single Currency, in my view; it’s rather about the whole construction of the Eurozone.
One has to think about the flaws of the Eurozone. And I’m referring to the lack of a common treasury. Not only world experience, but also theory indicates that an economic union cannot function properly unless a single currency is underpinned simultaneously by – not simply fiscal rules – but by fiscal integration. Fiscal integration is not equivilant to fiscal rules. An economic union needs mechanisms for dealing with asymmetric shocks. Dealing with asymmetric shocks boils down to what national governments can do. In an ideal world, with homogenous national economic spaces, with enormous real convergence, one could work with the assumption that there there is no need for an EU budget – that national governments can deal with asymmetric shocks. But this is not an ideal world. There is a need for a common treasury. I’m talking about the Eurozone here, but the Eurozone could shape the whole EU.
Is there any point in issuing Eurobonds, then? Would they help in the short-term?
Issuing Eurobonds, in my view, can deal with speculative attacks, but over the longer run it is not going to foster economic convergence. What we have experienced, even before the current crisis – is Mezzogiorno-fication in the Single Currency part of the EU. We’ve been witnessing the Mezzogiorno-fication of the southern fringe in terms of competitiveness, and that has beeen hidden by imports from Asia, cheap credit, etc. This structure cannot be dealt with by issuing Eurobonds. We can issue them (assuming Germany, the Netherlands, etc. allow it) but there are still gaps in terms of competitiveness and rigidity of labour markets – people do not move throughout the EU as they do in Canada or the US.
But you’re talking about instituting a transfer union that will transfer “surplus” from wealthy countries (i.e. Germany) to less wealthy countries (i.e. the so-called “Club Med” countries of Southern Europe). This sort of suggestion is deeply unpopular.
Yes, but I’m not just talking about transfers from the Netherlands, Germany, etc., to Greece, Portugal and Ireland. Because it may be that in the future, especially with ageing populations and the demographic changes that will occur, that the transfers go the other way. I’m talking about tools and mechanisms. There’s a hell of a difference between naming specific countries and creating tools and mechanisms.
So, you don’t believe that Eurobonds are the solution to the crisis? They’re just the beginning?
The Eurobond is not sufficient. The eurobond is just one step. A formative step. It can help the eurozone to combat speculitive attacks – and that’s key. But over the longer run, it cannot deal with the challenge of making the area functional.
What do YOU think? Are Eurobonds necessary? Are they just the beginning of the road to full fiscal union? Or is this just another excuse to infringe the sovereignty of EU member-states? Perhaps the solution is a looser, intergovernmental approach to co-operation and co-ordination? Or even the abolition of the Euro? Let us know in the form below, and we’ll take your comment to experts and policy-makers from across Europe for their reaction.