Wednesday, August 17, 2011

We should not surrender to sovereign markets

Between 25 July and 6 August, the sovereign debt crisis reached its most critical point as it spread to Italy and Spain where yields on State bonds reached their maximum levels. On 8 August, the European Central Bank (ECB) had to intervene buying back Italian and Spanish bonds to calm down financial markets . There was no other choice but to act : Italy like Spain are too big to fail.

Under the pressure of the European Central Bank and the EU, the Italian government was forced to issue a new plan which includes a series of unpopular measures to reduce public spending - especially on public sector wages and pensions - as well as on the revenue side with a special solidarity tax for higher incomes and higher taxation on capital gains. The whole set of measures is set to have negative effects on poor and middle classes and those who pay taxes whilst it does not affect (or very little) the rich and those who evade taxes.

But the key measure imposed by the ECB (in a confidential letter to the Italian PM) is to bring forward the budget balance in 2013 (instead of 2014) and the introduction of a no deficit clause in the national constitution. This has no precedent in European history: weaker States are losing their economic powers in terms of public spending and taxation. But this is not happening though fiscal integration of the EU nations which requires a much larger EU budget and more powers to the European Commission; it is just a mechanism of inter-governmental coordination and surveillance of national public finances which was introduced with the reform of the Stability Pact.

Yesterday's summit between France and Germany on the euro governance* raised strong expectations, but the outcome is rather disappointing. The two leaders stressed the need for greater economic coordination - which will be led by Herman Van Rompuy, the current President of the EU council. This will involve the inclusion of a 'golden rule' (no deficit) in all national constitutions by summer 2012. The other key proposal is a tax on financial transactions (the so-called Tobin tax) but there is no detail on how it will be applied throughout the EU.

The French-german meeting has produced a pact of the strong based on financial orthodoxy. Italy was a test case of the new economic order. But the pledge for stronger coordination will not suffice to stop the widening debt crisis. The creation of new government bonds backed by all member States of the euro area - which is gaining acceptance by more economists and federalist politicians - is simply ruled out, or at best will be considered in future.

The obsession for debt reduction without growth will just worsen the situation and until Germany refuses to take another direction, it will just produce another economic mess. But Europe requires a political leadership based on a long term vision  to fight international speculation . The solution, or at least part of it, resides in a certain degree of tax harmonization and a common conduct of fiscal policies based on mutual aid and solidarity. This will open a new phase for the euro with the creation of eurobonds which are a tangible and necessary instrument to insufflate a new common spirit.

 Protecting the euro means preserving a true European Union as a global public good. A European Union that defends the general interest of all states and citizens against the individual and selfish interest of strong economic powers. Unfortunately, this is not the vision of a political European Union that prevails today.


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