Ed,
Well the article you;ve sent along is a very good apologia for the EU. And
Eichengreen's remedy is sensible enough -- from the financial point of
view. However, he misses out one huge problem. The elephant in the room is
that the EU grew too large, too quickly, accepted too many fudged national
accounts as a qualification for joining, and has too many languages,
cultures and historical experiences.
If, from now onwards, budgetary control is to be exercised from Brussels by
European Union Commissioners then can we imagine for one second that
workers (public service and private) in Greece, Spain, Portugal, Italy,
France and Germany -- to name less than half of the countries that are
going to be affected -- are going to knuckle under? Well, yes, we can
imagine it for one second, but not after one month, or two months or six
months of the sort of austerity, extreme in some cases, that will have to
be imposed.
As Karl Pohl, former head of the European Central Bank, says in an
interview in today's Der Speigel website, countries like Greece should
never have been invited in the first place. Moreover, it is probable that
at least Greece will have to leave and re-establish its own old currency
before it has a chance of adjusting to the world at large. Instead, as Pohl
says, the extraordinary "rescue" of last Sunday has really only benefited
the big banks and rich Greeks.
As Eichengreen says in the last para of the article, rescuing the EMU and
the EU may be an "unrealistically ambitious agenda". Too true it will be.
Keith
At 11:33 18/05/2010 -0400, you wrote:
Barry Eichengreen is Professor of Ecomics and Political Science and the U
of California, Berkely.
How to make Europes big gamble pay off
Barry Eichengreen
From Tuesday's Globe and Mail
The past few weeks have been the most amazing and important period of
the euros 11-year existence. First came the Greek crisis, followed by the
Greek bailout. When the crisis spread to Portugal and Spain, there was the
$1-trillion rescue. Finally, there were unprecedented purchases of
Spanish, Portuguese, Greek and Irish bonds by the European Central Bank.
All of this was unimaginable a month ago.
Europes fortnight mirabilis was also marked by amazing and erroneous
predictions: Greece would be booted out of the monetary union; the euro
zone would be divided into a Northern European union and a Southern
European union; or the euro and even the European Union would
disintegrate as Germany turned its back on the project.
But, rather than folding their cards, European leaders doubled down. They
understand that their gamble will be immensely costly if it proves wrong.
They understand that their political careers now ride on their massive
bet. But they also understand that they already have too many chips in the
pot to fold.
Those forecasting the demise of the euro were wrong because they
misunderstood the politics. The euro is the symbol of the European
project. Jacques Delors, one of its architects, once called the single
currency the jewel in Europes crown. Abandoning it would be tantamount
to declaring the entire European integration project a failure.
It is true that Germans are incensed about bailing out Greece. It is true
that Angela Merkel is the first postwar German chancellor not to have
lived through the Second World War. But her views and actions are shaped
by the society in which she lives, which in turn is shaped by that
history. And what is true of Ms. Merkel is still true of Europe. This is
why the European leaders swallowed hard and took their unprecedented steps.
But, having doubled their bet, the Europeans now must make their monetary
union work. Europe has excellent bank notes. It has an excellent central
bank. But it lacks the other elements of a proper monetary union. It needs
to establish them and fast which requires finally addressing matters
that have been off limits in the past.
First, Europe needs a Stability Pact with teeth. This will now happen,
because Germany will insist on it. As the European Commission has
proposed, the strengthened pact will have tighter deficit limits for
heavily indebted countries. Exceptions and exemptions will be removed.
Governments will be required to let the commission vet their budgetary
plans in advance.
Second, Europe needs more flexible labour markets. Adjustment in the
United States monetary union occurs partly through labour mobility. This
will never apply to Europe to a similar degree, given cultural and
linguistic barriers.
Instead, Europe will have to rely on wage flexibility to enhance the
competitiveness of its depressed regions. This is not something that it
possesses in abundance. But recent cuts in public-sector pay in Spain and
Greece are a reminder that Europe is, in fact, capable of wage
flexibility. Where national wage-bargaining systems are the obstacle, the
European Commission should say so, and countries should be required to
change them.
Third, the euro area needs fiscal co-insurance. It needs a mechanism for
temporary transfers to countries that have put their public finances in
order but are hit by adverse shocks.
To be clear, this is not an argument for Germanys dreaded transfer
union ongoing transfers to countries such as Greece. It is an argument
for temporary transfers to countries, such as Spain, that balanced its
budgets before the crisis but then was hit by the housing slump and
recession. It is an argument for fiscal insurance running in both directions.
Fourth, the euro zone needs a proper emergency-financing mechanism.
Emergencies should not be dealt with on an ad hoc basis by 27 finance
ministers frantic to reach a solution before the Asian markets open. And
the European leaders, in their desperation, should not coerce the European
Central Bank into helping. There should be clear rules governing
disbursement, who is in charge and how much money is available. It should
not be necessary to obtain the agreement of 27 national parliaments each
time action is required.
Finally, Europe needs coherent bank regulation. One reason the Greek
crisis is so difficult is that the European banks are undercapitalized,
overleveraged and stuffed full of Greek bonds, thereby ruling out the
possibility of restructuring and thus lightening Greeces debt load.
That happened because European bank regulation is still characterized by a
race to the bottom. Colleges of regulators, the supposed solution, are
inadequate. If Europe has a single market and a single currency, it needs
a single bank regulator.
This is a formidable some would say unrealistically ambitious agenda.
But it is the agenda Europe needs to complete to make its monetary union work.
Keith Hudson, Saltford, England
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