While America’s credit downgrade and rioting in London have grabbed the headlines, the financial crisis in the eurozone rumbles on.
The European Central Bank (ECB) moved Wednesday to buy Spanish and Italian bonds in the hope of staving off a spiral in debt costs or the need to bail out such large economies.
The move was widely viewed as a positive – if stopgap – measure, but market volatility continues.
Stocks across Europe have plunged amid worries that France is about to follow the US in losing its triple A-rating. The share dive, now affecting markets across the continent with France, Germany, and Spain slumping by more than five percent, is led by fears over bank solvency. Stock in France’s Société Générale alone dropped by almost 15 percent, followed by BNP Paribas and Credit Agricole losing up to 10 percent of their value.
To help stem the crisis, a growing number of European officials are calling for a truly European Union-wide solution to the eurozone’s woes. Even some euroskeptics now agree that the common currency needs to be supported by common fiscal policies that prevent member states from accumulating too much debt and requiring bailouts.
“That’s always the answer in Brussels,” says Dan Hannan, a member of Britain’s eurosceptic governing Conservative Party and a British member of the European Parliament. “Whatever the question is, the answer is ‘more Europe.’ If there’s a rainy day in Eindhoven, the answer is ‘more Europe.’ The problem with [an EU-wide fiscal policy] is, you cannot jam countries with wildly divergent needs into the same exchange rates and interest rates.”
A common fiscal policy?
While the euro is the de-facto EU currency, each of the eurozone’s seventeen constituent nation states sets its own fiscal policy.
Ireland’s famously low corporate tax rate of 12.5 percent, for instance, has attracted criticism from German Chancellor Angela Merkel and French President Nicolas Sarokzy.
Thus far Ireland has refused to budge, with Irish Prime Minister Enda Kenny last month dismissing calls for a “common corporate tax base” across the EU as “tax harmonization by the back door.”
‘Europe is still sexy’
Last month, President of the European Council, Herman Van Rompuy, declared: “Europe is still sexy.”
Mr. Van Rompuy said that the EU was in “good shape” as it continued to attract new members. But doubts remain about who would want to join the eurozone right now, particularly with unpopular austerity measures being imposed on Portugal, Ireland, and Greece in return for bailouts.
In June, ECB president Jean-Claude Trichet called for a single eurozone finance ministry to be created, a move that would centralize taxation and spending powers above the level of national governments.
Such a move seems unlikely, but lesser calls are getting a hearing. Rather than just buying bonds issued by individual eurozone nations, as is happening now, many are calling for the ECB to issue its own “eurobonds.”
Political integration is a logical outcome of currency union, says George Magnus, an economist with Swiss bank UBS who predicted the global economic crash.
“What we’ve learned from the eruption of this crisis – well it’s not really learning, we knew this before, that monetary union on its own probably doesn’t make a union of countries viable – is that you’ve got to have some degree of integration of budgetary and fiscal policy, which speaks to some kind of political union as well,” says Mr. Magnus. “Integration is clearly where the crisis is driving the eurozone. But it’s not clear to me, or, I don’t think, to anybody really, how far this process of integration will go.”
One call for EU integration came from an unlikely source.
On Monday, British Finance Minister George Osborne called for closer fiscal ties within the eurozone, despite his country being outside the single currency.
“Eurozone countries need to accept the remorseless logic of monetary union that leads from a single currency to greater fiscal integration,” wrote Mr. Osborne in the Daily Telegraph. “Solutions such as eurobonds now require serious consideration if investors are to be convinced about the long-term future of the currency.”
“Eurobonds” are just one suggested method of stabilizing affairs – others include pan-European taxes and transforming the €440 billion ($625 billion) European Financial Stability Facility “bailout fund” into a more comprehensive European Monetary Fund valued at up to €2 trillion ($2.8 trillion) and complete with powers of national budgetary oversight – but they all hinge on countries ceding authority to Brussels.
Despite this, Professor Brian Lucey, economist at Trinity College Dublin, says “more Europe” may not be popular, but it’s the only option.
“I think the only feasible answer is ‘more Europe,’ he says. “There are two poles: break-up of the euro is one, but too much has been invested politically for that to happen. The other, equally toxic politically, is a fully integrated Europe taking on a political composition like that of the US or perhaps Switzerland.”
Mr. Lucey says tighter integration cannot be to the point of anything approaching statehood but that failure to recognize the need for fiscal integration is what is now being played-out.
“The euro should have been an outcome of greater fiscal co-ordination,” says Lucey. “We put the cart before the horse. A horse can push a cart, but it doesn’t do it very well.”