Click amount to donate direct to CounterPunch
  • $25
  • $50
  • $100
  • $500
  • $other
  • use PayPal
Support Our Annual Fund Drive! CounterPunch is entirely supported by our readers. Your donations pay for our small staff, tiny office, writers, designers, techies, bandwidth and servers. We don’t owe anything to advertisers, foundations, one-percenters or political parties. You are our only safety net. Please make a tax-deductible donation today.
FacebookTwitterGoogle+RedditEmail

“Fiscal Union” Merkel-Style

by MIKE WHITNEY

Angela Merkel has a cure for the eurozone’s pesky debt crisis. Hair shirts and stiffer penalties. Aside from that, the German Chancellor has very little to offer by way of a remedy. In fact–what was so surprising about Monday’s widely-anticipated press conference with Merkel and French President Nicholas Sarkozy–was the absence of any new ideas at all. It was just a rehash of the worn Stability and Growth Pact (that limits deficits to 3 percent of GDP) with an added push to make “debt discipline” provisions legally enforceable. In other words, old wine in new bottles.

Still, the markets applauded the charade and rose accordingly until S&P spoiled the festivities by threatening to downgrade 15 EZ countries if they didn’t get their act together pronto. Here’s the story from Reuters:

“Citing “continuing disagreements among European policy makers on how to tackle the immediate market confidence crisis,” S&P threatened to cut the credit ratings of 15 countries, including Germany and France, by 1-2 notches.

It also warned of slowing growth amid so much austerity, predicting a 40 percent chance of a fall in euro zone output.

A downgrade could automatically require some funds to sell bonds of affected states, making those countries’ borrowing costs rise still further.” (Reuters)

So, with the ratings agencies breathing down their necks and the credit markets in turmoil, you’d think that French and German leaders would grasp the gravity of the situation and make a good-faith effort to clean up the structural problems with the single currency. But that, apparently, is not in the script. The plan is to trot out the same failed policies that have pushed the eurozone to the brink of disaster and re-label them “fiscal union”.

But is anyone really fooled by this public relations farce? Legally enforceable austerity measures and a ramshackle underfunded emergency facility (EFSF) do not constitute fiscal union, not by a long shot. If Merkel wants to keep the bond vigilantes at bay and prevent the eurozone from being ripped to shreds by market forces, she’s going to have to do better than that. This fiasco is fast reaching its climax.

So, what should Merkel and Sarkozy be doing?

Here’s what Nobel Economics prize winner Christopher Sims recommends:

“I think some kind of (joint) euro bond and some kind of European-wide fiscal authority will have to be part of any solution that is really stable,” Sims told Reuters late on Monday, dismissing the idea that simply tightening budget discipline would suffice.

“A euro bond that was clearly backed by some kind of euro-wide fiscal authority would have the same kinds of advantages that U.S. treasury bills do now.”….

“Fiscal integration needs to involve more than just budget discipline, more than just the centre telling countries they have to shape up and raise taxes or cut expenditures,” Sims said, lending his support to views that financial market economists have been pressing.” (“Euro zone needs own bonds and tax: Nobel economist”, Reuters)

Did we mention that Merkel is opposed to eurobonds, fiscal transfers, debt pooling, and lender of last resort? The problem is–while the German Chancellor is entitled to her opinion–these are the policies that make fiscal union possible, not budget discipline. Budget discipline merely creates a rules-based system that eschews real union. Here’s how authors Simon Tilford and Philip Whyte, explain it in their “must read” analysis for The Center for European Reform titled “Why Stricter Rules Threaten the Eurozone”:

“It is now clear that a monetary union outside a fiscal union is a deeply unstable arrangement; and that efforts to fix this flaw with stricter and more rigid rules are making the eurozone less stable, not more…..tighter rules do not amount to greater fiscal integration. The hallmark of fiscal integration is mutualisation – a greater pooling of budgetary resources, joint debt issuance, a common backstop to the banking system, and so on.

Tighter rules are not so much a path to mutualisation, as an attempt to prevent it from happening.” (“Why stricter rules threaten the eurozone, Simon Tilford and Philip Whyte, The Cernter for European Reform)

So, Frau Merkel can wheel her lawnmower onto stage and call it fiscal union if she likes, but it doesn’t make it so. Real fiscal integration requires a bond market that pools the debt of the member states , as well as a central bank that backs it debt with the eurozone’s “full faith and credit”, a blanket guarantee on government bonds. In some respects, Merkel has already agreed to this by confirming that bondholders will not have to “take losses on any future eurozone bail-outs”. (FT) This blatant giveaway to big finance was on top of Sarkozy’s list of demands. The “no haircuts” clause means that all future losses from sovereign restructuring will be foisted on EU taxpayers.

All told, the Merkle blueprint for fiscal union is just more of the same, more can-kicking and procrastination. It solves nothing. The structural issues have not been addressed nor has there been any effort to curtail the flow of capital to the perimeter. The reason the eurozone is in such dire straits to begin with is because policymakers have repeatedly misdiagnosed the problem and prescribed the wrong medication. The focus should never have been on profligate spending and deficits, but on the humongous macroeconomic imbalances that arose due to excessive bank lending to countries in the south. That’s where the real problem lies. Most of the countries that are now in distress were playing by the rules until the crash of ’08. That implosion triggered a reversal of capital flows which, in turn, sent bond yields soaring. In other words, there was a sovereign bond bubble that was caused by a combination of overconfidence, easy money and loose regulation. Where have we heard that before?

So, what Euro leaders need to do now is either control the flow of capital to the weaker states or implement fiscal transfers to help the deficit countries muddle through. Unfortunately, Merkel and Co. are no where near a settlement that will deal with these core-issues, so the problems will continue to fester and spread.

So, how does this all end?

We’ll let Simon Tilford and Philip Whyte answer that question with another ominous passage from their outstanding article:

 

“On current policy trends, a wave of sovereign defaults and bank failures are unavoidable. Much of the currency union faces depression and deflation. The ECB and EFSF will not keep a lid on bond yields, with the result that countries will face unsustainably high borrowing costs and eventually default. This, in turn, will cripple these countries’ banking sectors, but they will be unable to raise the funds needed to recapitalise them. Stuck in a vicious deflationary circle, unable to borrow on affordable terms, and subject to quixotic and counter-productive fiscal and other rules for what support they do get from the EFSF and ECB, political support for continued membership will drain away.” —(“Why Stricter Rules Threaten the Eurozone”, Simon Tilford and Philip Whyte, The Cernter for European Reform)

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at fergiewhitney@msn.com.

More articles by:

2016 Fund Drive
Smart. Fierce. Uncompromised. Support CounterPunch Now!

  • cp-store
  • donate paypal

CounterPunch Magazine

minimag-edit

September 29, 2016
Robert Fisk
The Butcher of Qana: Shimon Peres Was No Peacemaker
James Rose
Politics in the Echo Chamber: How Trump Becomes President
Russell Mokhiber
The Corporate Vice Grip on the Presidential Debates
Daniel Kato
Rethinking the Race over Race: What Clinton Should do Now About ‘Super-Predators’
Peter Certo
Clinton’s Awkward Stumbles on Trade
Fran Shor
Demonizing the Green Party Vote
Rev. William Alberts
Trump’s Road Rage to the White House
Luke O'Brien
Because We Couldn’t Have Sanders, You’ll Get Trump
Michael J. Sainato
How the Payday Loan Industry is Obstructing Reform
Robert Fantina
You Can’t Have War Without Racism
Gregory Barrett
Bad Theater at the United Nations (Starring Kerry, Power, and Obama
James A Haught
The Long, Long Journey to Female Equality
Thomas Knapp
US Military Aid: Thai-ed to Torture
Jack Smith
Must They be Enemies? Russia, Putin and the US
Gilbert Mercier
Clinton vs Trump: Lesser of Two Evils or the Devil You Know
Tom H. Hastings
Manifesting the Worst Old Norms
George Ella Lyon
This Just in From Rancho Politico
September 28, 2016
Eric Draitser
Stop Trump! Stop Clinton!! Stop the Madness (and Let Me Get Off)!
Ted Rall
The Thrilla at Hofstra: How Trump Won the Debate
Robert Fisk
Cliché and Banality at the Debates: Trump and Clinton on the Middle East
Patrick Cockburn
Cracks in the Kingdom: Saudi Arabia Rocked by Financial Strains
Lowell Flanders
Donald Trump, Islamophobia and Immigrants
Shane Burley
Defining the Alt Right and the New American Fascism
Jan Oberg
Ukraine as the Border of NATO Expansion
Ramzy Baroud
Ban Ki-Moon’s Legacy in Palestine: Failure in Words and Deeds
Gareth Porter
How We Could End the Permanent War State
Sam Husseini
Debate Night’s Biggest Lie Was Told by Lester Holt
Laura Carlsen
Ayotzinapa’s Message to the World: Organize!
Binoy Kampmark
The Triumph of Momentum: Re-Electing Jeremy Corbyn
David Macaray
When the Saints Go Marching In
Seth Oelbaum
All Black Lives Will Never Matter for Clinton and Trump
Adam Parsons
Standing in Solidarity for a Humanity Without Borders
Cesar Chelala
The Trump Bubble
September 27, 2016
Louisa Willcox
The Tribal Fight for Nature: From the Grizzly to the Black Snake of the Dakota Pipeline
Paul Street
The Roots are in the System: Charlotte and Beyond
Jeffrey St. Clair
Idiot Winds at Hofstra: Notes on the Not-So-Great Debate
Mark Harris
Clinton, Trump, and the Death of Idealism
Mike Whitney
Putin Ups the Ante: Ceasefire Sabotage Triggers Major Offensive in Aleppo
Anthony DiMaggio
The Debates as Democratic Façade: Voter “Rationality” in American Elections
Binoy Kampmark
Punishing the Punished: the Torments of Chelsea Manning
Paul Buhle
Why “Snowden” is Important (or How Kafka Foresaw the Juggernaut State)
Jack Rasmus
Hillary’s Ghosts
Brian Cloughley
Billions Down the Afghan Drain
Lawrence Davidson
True Believers and the U.S. Election
Matt Peppe
Taking a Knee: Resisting Enforced Patriotism
FacebookTwitterGoogle+RedditEmail
[i]
[i]
[i]
[i]