Tilford and Whyte on the euro crisis

Simon Tilford and Philip Whyte have written an essay – Why stricter rules threaten the eurozone” – on the euro crisis for the normally strongly pro-European Centre for European Reform. I far from agree with everything in the report, but it is worth a read.

Here is the conclusion (for the lazy):

“When the euro was launched, critics worried that it was inherently unstable because it was institutionally incomplete. A monetary union, they argued, could not work outside a fiscal (and hence a political) union. Proponents of the euro, by contrast, believed that a currency union could survive without a fiscal union provided it was held together by rules to which its member-states adhered. If, however, a rules-based system proved insufficient to keep the monetary union together, many supporters assumed (as faithful disciples of Jean Monnet) that the resulting crisis would compel politicians to take steps towards greater fiscal union.

Initially, proponents of the euro seemed to have been vindicated. The euro enjoyed a remarkably uneventful birth, and a superficially blissful childhood. But its adolescence has been more troubled, lending increasing weight to the euro’s critics. If anything, a shared currency outside a fiscal union has turned out to be even less stable than the critics imagined. Common fiscal rules did not guarantee the stability of the system – not just (as North European politicians like to claim) because they were broken, but also because they were inadequate. The eurozone now faces an existential crisis – and EU politicians their ‘Monnet moment’. At root, the eurozone’s sovereign debt crisis is a crisis of politics and democracy. It is clear that the eurozone will remain an unstable, crisis-prone arrangement unless critical steps are taken to place it on a more sustainable institutional footing. But it is equally clear that European politicians have no democratic mandate in the short term to take the steps required. The reason is that greater fiscal integration would turn the eurozone into the very thing that politicians said it would never be: a ‘transfer union’, with joint debt issuance and greater control from the centre over tax and spending policy in the member-states.

Eurozone leaders now face a choice between two unpalatable alternatives. Either they accept that the eurozone is institutionally flawed and do what is necessary to turn it into a more stable arrangement. This will require some of them to go beyond what their voters seem prepared to allow, and to accept that a certain amount of ‘rule-breaking’ is necessary in the short term if the eurozone is to survive intact. Or they can stick to the fiction that confidence can be restored by the adoption (and enforcement) of tougher rules. This option will condemn the eurozone to selfdefeating policies that hasten defaults, contagion and eventual break-up. If the eurozone is to avoid the second of these scenarios, a certain number of things need to happen. In the short term, the ECB must insulate Italy and Spain from contagion by announcing that it will intervene to buy as much of their debt as necessary. In the longer term, however, the future of the euro hinges on the participating economies agreeing at least four things: mutualising the issuance of their debt; adopting a pan-European bank deposit insurance scheme; pursuing macroeconomic policies that encourage growth, rather than stifle it (including symmetric action to narrow trade imbalances); and lowering residual barriers to factor mobility.”

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  1. Hi There Lars Christensen,
    Very interesting, The German team seems to be very confident for the Euro 2008 despite they haven’t won any European Championship since 1996. Since the 2006 World Cup the team is still very optimistic due to all the euphoria and excitement received. Up to this point the Germans have defeated the two Euro co-host Austria and Switzerland and expect to continue their winning streak.
    All the Best
    In America: governments, businesses, individuals are now buried under a mountain of debt. A mountain of debt that will never be repaid.

    Who will borrow when they can’t make the payments on the debt that they have already? The math alone calls for a system reset, a debt jubilee.

    Investors are already losing… in a rigged monetary casino that rewards usury, speculation, and currency manipulation while looting main street.

    There is a moral principle that debts should be honored. That is, debts between businesses that buy and sell real products, not bundled ponzi schemes, debts between individuals, between friends and businesses that know each other to be rational and moral, debts based on investments where there is a rational expectation of return.

    There is also a moral principle that unjust debts should be cancelled, and usury legislated against. Debts that are ‘odious’, debts based on fraud, debts to dictators, debts arranged by oligarchs without the consent of the general population (the 99 percent who have been left out of the equation), debts based upon compound interest upon compound interest, that should have been written off long ago, the debts need to be cancelled in a general jubilee. Think outside the box. It’s time for a jubilee.


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