Saving The Euro

posted at 10:58 am on December 5, 2011 by Bruce McQuain
[ Economics ]   

There is, according to the New York Times, a tentative plan afoot put together by European leaders to save the Euro and end the crisis there. Here’s how Stephan Erlanger describes it:

In the process, European leaders will begin to change the fundamental structure of the union, creating a form of centralized oversight of national budgets, with sanctions for the profligate, to reassure investors that this kind of sovereign-debt crisis is finally being managed and should not happen again.

The immediate focus of worry is on Italy and Spain, which have been buffeted by market speculation even as they move to fix their economies. That process took an important step on Sunday, as Italy’s cabinet agreed to a package of austerity measures to put the country in line for aid that would improve its financial stability.

The new euro package, as European and American officials describe it, is being negotiated along four main lines. It combines new promises of fiscal discipline that will be embedded in amendments to European treaties; a leveraging of the current bailout fund, the European Financial Stability Facility, to perhaps two or even three times its current balance; a tranche of money from the International Monetary Fund to augment the bailout fund; and quiet political cover for the European Central Bank to keep buying Italian and Spanish bonds aggressively in the interim, to ensure that those two countries — the third- and fourth-largest economies in the euro zone — are not driven into default by ruinous interest rates on their debt.

Emphasis mine. In other words these disparate countries linked only by a common currency are now going to give up their national sovereignty (i.e. their budgets) to ensure its stability? Really?

Well someone believes that’s going to do the trick because after the outline was announced, Italian bond yields “collapsed”. From a high of 7.4% before Thanksgiving, they’re now down to around 6.15%. While that’s a huge move, it still spells a country in trouble. Now, of course, they’re going to give up having the final say on their budgets?

I wonder how that’s going to play in Greece.

The problem, of course, is the usual one:

So Mr. Sarkozy and other European leaders are working on a less elegant and more phased way to create a pool of bailout money that is large enough to convince the markets there is little chance of a default on Italian and Spanish bonds, which should drive down rates to sustainable levels, European and American officials say.

Mrs. Merkel says it is time to get the euro’s fundamentals right. She is insisting on treaty changes to promote more fiscal discipline, including a limit on budget deficits, with outside supervision and surveillance of national budgets before they become dangerous, and clear sanctions for countries that fail to adhere to the firmer rules. Berlin wants the new standards backed up by the European Court of Justice or perhaps the European Commission, with the power to reject budgets that break the rules and return them for revision.

She would like the treaty changes to be accepted by all 27 members of the European Union, but failing that, she said she would accept treaty changes within the euro zone, with other countries who want to join in the future, like Poland, free to commit to the tougher rules now. Many countries, and not only Britain, are opposed to institutionalizing a two- or even three-tier European Union, fearing that their interests will be sacrificed and their voices diminished.

Mr. Sarkozy, as the political inheritor of Gaullism, disagrees about the reach and nature of European supervision of national budgets and about the role of European institutions in overseeing the fiscal affairs of sovereign states. The French are more jealous of their sovereignty and more skeptical of European courts, not wishing to give them — let alone the bureaucratic European Commission — more sway over national budgets and policies.

“Europe must be refounded and rethought,” Mr. Sarkozy said last week. “But the reform of Europe is not a march toward supranationality.”

But in reality, “supranationality”, while possibly the needed solution, is very unlikely to come about. And then there is enforcement of sanctions by some entity outside of a national one. National politicians would only have a preliminary say in national budgets.

We’ve seen how the Greeks react to their own government attempting to enforce austerity measures. Imagine an outside body like the European Commission forcing the Greek government to revise its budget. Its also very clear the French want no part of it either. The emphasized sentence is how it has always been, i.e. distrust and fear about being sacrificed and diminished. That’s no way to hold a “union” together and it speaks volumes about the less than latent nationalism still in existence in all those disparate countries (and cultures). It all comes down to trust and it appears they really don’t trust each other.

So while the tentative deal may seem to be workable there have to be serious doubts about whether, even if finally agreed too, it can work. It just doesn’t factor in the national paranoia among most members about being subsumed by a “supranational” entity. Their identity, which most have guarded jealously, has always been a problem and, given the financial mess in the south, likely to intensify vs. lessening.

Is there a solution to save the Euro? Perhaps. But is giving up national sovereignty on budgets and allowing a “supranational” entity to overrule them and enforce sanctions going to actually come to pass? And if it does, will those who agree in a time of crisis actually do what they promise now if the crisis lessens?

I’m betting “no”.

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