The recent flurry of activity at the latest EU summit in Brussels is proving to be a bit of a damp squib. The proposed new treaty has not exactly set the heather alight and the bond markets remain unconvinced. One of the minor mysteries about the new treaty is why so many commentators describe it as a move to a Fiscal Union for the Eurozone. A Fiscal Union may be a good idea, but what is proposed is no such thing. A bit like French cheeses Fiscal Unions can come in a variety of shapes and disguises. However there are a few necessary properties of any Fiscal Union. 1. There has to be some kind of central or common government - let’s call it a Federal government. 2. This government has the power to set and raise taxes throughout the Union. 3. The government also has the power to spend the money raised in a way that is deemed to benefit the Union as a whole. 4. The government will raise more money from the richer parts of the Union and in return, redistribute some of this money in the poorer parts of the Union.
Now the proposals from Brussels do none of the above. It is a purely inter-governmental arrangement. It is as Angela Merkel more accurately describes it, a Stability Union. Unfortunately the only stability the Eurozone has at the moment is the stability of the dead and the dying. Economically speaking at least! The new measures will impose even greater austerity on a patient that has suffered from too much austerity already. Greece and Ireland are already in deep recession and Ireland is supposed to be the Eurozone’s star pupil.
What is missing from all the EU’s endless round of summits is any sense of urgency and in particular any measures to promote growth in the Eurozone. As with generals, EU leaders are more interested in fighting old wars than in facing up to the realities of the current situation. To recap, inflation is not a major problem for the foreseeable future and government deficits and national debts did not cause this global crisis. The current deficits and high levels of debt are primarily symptoms of the crisis and not its cause. The deficits and debts will only rise, as is happening in the UK, until governments come up with some kind of credible strategy to generate growth in their economies. Don’t hold your breath. What we are likely to get is more re-arranging of the deckchairs while the good ship Euro sinks further and further into the mire. It will probably take some really serious shock - an Irish default?, the collapse of a major French or German bank? to propel our leaders into genuine action.