Full Fiscal Union or the Euro is Sunk

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Macroeconomics

Wolfgang Münchau, an experienced Financial Times columnist with over twenty years in the trenches reporting on the European market laid out the stark options for Europe in an article this week.

In its current form, the Euro won’t see out this decade he said. The fundamental problem being that Europe’s political leaders and their economic advisers are, for the most part, financially illiterate. They have totally failed to grasp the seriousness of the situation or to tackle the long term causes of the crisis. Instead they are applying sticking plasters in the form of a bailout package for debt laden Greece when the real problem is a banking crisis. Europe’s political elite still believe they are in control of the situation and that a combination of austerity and financial repression will do the trick. Investors, meanwhile, do not understand how Greece, Spain and Germany can coexist in a monetary union. The two sides are poles apart, and as the markets go against each other, the union is likely to be the one that loses out.

Recently Spain successfully forced the publication of stress tests for Europe’s top 25 banks. A move the Spanish insisted on to show that their major banks were financially sound contrary to media suggestions. The reality is many German and French are not, indeed Münchau believes they are technically insolvent, but the fear is the EU is embarking on publishing these details without a follow-up plan to recapitalize the banks.

Beyond this restructuring, Wolfgang Münchau says the euro-zone will need to commit itself to a full-blown fiscal union and proper political institutions that give binding macroeconomic instructions to member states for budgetary policy, financial policy and structural policies. The public and private sector imbalances are so immense that they are not self-correcting. The alternative is that Greece at least and possibly others will eventually leave the union.

Progress to full fiscal and monetary union is looking less likely with every passing month, nationalist resentment at the cost of the bailouts is mounting while resistance to the austerity measures being imposed is causing social unrest among recipients. Horrified at the state of profligacy in southern European states it is highly unlikely the populace of northern states would vote (assuming they were given the chance and the process of European integration is not noted for its adherence to democratic principals) for full-blown integration. Germany has already invested in a decade of integration with the east at huge expense, would it willing do the same for non Germanic Greece, Portugal, even Spain?

Europe’s leaders assert that the crisis is all caused by speculators and short sellers, and that if these activities could be banned all would be well is a fiction. The reality is the markets are simply illuminating the problems with a spot light the authorities would rather be kept in darkness, banning the light doesn’t make the underlying problem go away.

–Stuart Burns

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