15 July 2012

Wolfgang Münchau: The eurosceptics have the best lines again

As in Britain in the 1990s, today's pro-Europeans are incapable of defending the idea that a monetary union requires a banking union, a minimally sufficient fiscal union with tax-raising powers, and a political union with a legislative mandate independent of Member States, comments Münchau in his FT column.

There are eerie parallels between the euro debates in the UK in the late 1990s and in the northern eurozone today. Back then, the anti-euro campaigners in the UK highlighted the shortcomings in the construction of the eurozone – an analysis that turned out to be correct – and also correctly predicted the euro would require a political union to succeed in the long run. I did not share that view but I recall admitting back then that if you do not accept political union, logically you should not accept the euro either. There was never a purely economic case for the currency.

A properly constructed banking union will, of course, imply permanent transfers, as would a properly defined fiscal union. The idea that you can resolve the eurozone crisis without transfers of any sort is delusional. Since the German banking system is relatively stronger than Spain’s, a banking union would, of course, imply a loss for Germany. If you have joint deposit insurance and joint banking recapitalisation, surely transfers will take place – just as they now take place inside countries themselves.

The pro-campaigners in Germany, as in Britain 13 years ago, pretend to be pragmatic. This is why they agree with Chancellor Angela Merkel’s rejection of eurozone bonds. They are not a sellable proposition in Germany, they say. Likewise, they agree that economic adjustment in the eurozone cannot be symmetrical, again on the grounds that it is not a sellable proposition. For the same reason, they also support all the deficit rules, despite the fact that they have never worked. They also reject changes to the European Central Bank’s mandate. With pro-Europeans like that, who needs eurosceptics?

The proposal by the German council of economic advisers for a so-called debt redemption fund falls into the same category. It is another tribute to the shrine of pragmatism. It appears pro-European but, on closer inspection, it is not going to resolve the debt crisis. A debt redemption fund is an instrument to pool a portion of each country’s debt in exchange for the issuance of a eurozone bond. But the idea is for the debt to be repaid, so the bond issue will ultimately expire. That may be fine for relatively small amounts, but Italy’s “excess” debt is about €1 trillion. The idea that Rome can repay its excess debt in 25 years is insane, unless you assume a miraculous and sustained pickup in economic growth.

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