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The only mechanism the European Union has, or can have, for imposing fiscal discipline in any country or region is to refuse further payments to that country or region. This is precisely the mechanism that has been deployed, with limited success.
A Franco-German monetary union was an ambitious project. But the half dozen potential members of such a union mostly had political and economic institutions sufficiently robust to handle the consequences. The success of such a project over the past decade might have provided a springboard for expansion.
But an excess of ambition extended membership of the eurozone to states that were neither willing nor able to accept the economic disciplines that replaced those imposed by the currency market. These states were enabled to escape serious consequences by funding budget and trade deficits through public and private borrowing. They will continue to be able to do so until creditors believe they will not be repaid – which would, if the new stability fund were to succeed in its objectives, mean that they could continue these policies for ever. The eurozone’s difficulties have been created by Member States not markets, giving members more resources to fight markets makes things worse, not better.
The eurozone’s difficulties result not from the absence of strong central institutions but the absence of strong local institutions. A miscellany of domestic problems – rampant property speculation in Ireland and Spain, hopeless governance in Italy, lack of economic development in Portugal, Greece’s bloated public sector – have become problems for the EU as a whole. The solutions to these problems in every case can only be found locally.
Whenever you assert responsibility for issues you do not have authority to tackle, you risk a crisis of credibility that undermines the authority you do have. Europe’s leaders see themselves as mustering resources for a war with the markets: a war which they will lose, not just because they will never find sufficient resources to defeat the markets, but because they are really fighting reality.
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