05 June 2016

Financial Times: The eurozone cannot escape political and fiscal union

An insurance-based approach involves doing the least amount of integration necessary. It would not need full-blown political or fiscal union, but merely a few additional backstops to insure against banking crises or shocks affecting some members but not others. If a crisis hits, the insurance kicks in. [...]

The idea of crisis resolution through insurance suffers from an internal contradiction. The intention is to create something lighter than a political union, but you need a political union to provide the legal and political framework to make insurance possible.

Take the example of a pan-eurozone deposit insurance, favoured by the European Central Bank, the European Commission and the majority of member states — but not by Germany. From Berlin’s perspective, there are two arguments against it. The first is that it is not insurance at all but a hidden transfer. Since the banks of the southern member states are in worse shape, it is clear that any payout would be from the north. Asking for deposit insurance now is like buying car insurance after an accident.

The second argument is that intrastate insurance is not fundamentally different from a joint debt instrument — the eurobonds the Germans loathe so much. Insurance, too, is a form of joint liability; if one country is hit by crisis, the rest of the union will help. Insurance is technically different from a bond but it also entails shared responsibility. [...]

My conclusion is that there is no way around a political and fiscal union in the long run, even if the idea is growing less fashionable. Without it, I see no counterweight to a rise in German power in the eurozone and no end to the rise in intra-eurozone imbalances. The German current account surplus was almost 8 per cent of economic output last year and is still rising. Without a political union, there is a risk that at least one southern member state, probably Greece, Portugal or Italy, will opt to drop out of the eurozone. Even in Greece opposition to the euro is growing. [...]

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