How do we move closer to fiscal union while retaining enough independence?
TOWARDS THE end of last week, as Finland bickered with its European partners over its right to collateral for any further loans to Greece as part of an extended bailout programme, those urging Europe to show that it has the commitment to defend the euro had reason to despair.
Probably most disheartening has been the conflicting national voices issuing on an almost daily basis over the past five weeks. Writing earlier this month on the growing crisis in Europe and the United States, Nobel economist Joseph Stiglitz said: “now the scale of the problem is apparent, a new confidence has emerged – confidence that matters will get worse, whatever action we take.”
That confidence is based not on the fact that solutions are not available but that there appears no political will to shape naturally sceptical opinion at home in many of the euro’s member states.
Instead, politicians of all hues appear captive to their own local, short-term electoral interests. As a result, Europe is reacting after the event and in a piecemeal manner.
In the aftermath of the first stage of the financial crisis, triggered by the collapse of Lehman Brothers, European Central Bank president Jean Claude Trichet had hailed the strength of the euro in meeting that challenge. “Would Europe have been able to act as swiftly, decisively and coherently if we did not have the single currency uniting us?” he asked. It seems a hollow boast now.
True, the ECB has shown more leadership than others, agreeing eventually to underpin the debt of Italy and Spain when those countries threatened to unravel but only after securing tough commitments to fiscal reform, particularly in the case of Italy. Still, even those decisions seemed reluctant, made by a governing council whose divisions quickly became public.
The ECB’s action appears decisive only next to the political dithering of Europe’s political leaders. It is now five weeks since Europe’s leaders agreed the terms of a beefed-up bailout package and further help for Greece. Not a single country has yet approved it – in fact, despite the crisis, the only European parliaments recalled over the summer break were those of the UK (over the riots) and Italy (where most members simply did not bother turning up to discuss critical austerity measures). It will be the end of next month – and possibly into October – before the ratification process is complete.
And even before that, there is now a widespread acceptance that more needs to be done. Yet there is still no serious debate on what many commentators now believe is the only long-term path to viability for the euro – a stronger fiscal union.
Talk of greater union in the euro zone is anathema to many, in large part because of the incompetence of those political leaders charged down the years with making the case and also due to the failure of Brussels to demonstrate that it can be accountable to the people of Europe rather than to a narrow political and administrative elite.
There is also the fear that any centralising of power will lead only to greater control of the bloc by its most powerful economy, Germany. As my colleague Dan O’Brien pointed out over the weekend, this is a source of concern not only to Germany’s partners but to Germany itself.
But without greater cohesion in fiscal rules, it is difficult to see a long-term future for a currency union across such a disparate group of countries.
Speaking at the weekend in her first policy speech since assuming the presidency of the International Monetary Fund, Christine Lagarde suggested a fractured political process in Europe was contributing to insecurity.
Addressing the annual congregation of central bankers at Jackson Hole, in Wyoming, the former French finance minister said: “Europe must recommit credibly to a common vision, and it needs to be built on solid foundations – including, for example, fiscal rules that actually work.”
Trichet, despite his continued attached to price stability, concurred. At the same event, he said: “We are ourselves challenged paradoxically not necessarily – as a group, as an entity – because our fundamentals are very bad. Our fundamentals are not very bad. The problem is that we are challenged in our governance.”
Key decisions must be made. How could such a fiscal union be shaped to be functional without being overly prescriptive on national parliaments?
The current experience would suggest that Eurobonds, for all the hysteria they provoke in certain quarters, are part of the answer. But it is also true that they will work better, and be more acceptable, in a more defined fiscal union.
For Ireland, there are critical issues as well. How, for instance, do we move closer to fiscal union while retaining the independence we require to determine the shape of our tax code – most particularly corporation tax?
Will broader rules such as debt brakes – limits on expenditure and more importantly borrowings – be sufficiently flexible to retain national control of budgetary policy and the requirements of managing economies in recession but tight enough to avoid the wholesale abuse of the Stability and Growth Pact.
These are the questions that need to occupy our political leaders, not whether Finland gets collateral from a bankrupt Greece or whether euro-zone states can agree yet another, larger bailout fund.
