Sunday, March 4, 2012

Europe's fiscal union is at reach

The Eurogroup deal on Greece marks a new phase in the Greek debt crisis. It is the first experiment of a large fiscal transfer to an EU country, let aside the structural and cohesion funds. EU member States made the choice not to let Greece default. But prior to the disbursement of new bailout funds, the northern States imposed tough measures in the form of further expenditure cuts, privatizations and other reforms to bring the debt-GDP ratio down to 120% by 2020.  

We are in exceptional situation which has no equivalent in the European history. It requires, therefore, exceptional measures. M.Wolf wrote (FT 15.02): "The reason Greece has caused such difficulty is that the country's failings are extreme, not unique. Its plight shows that the eurozone still seeks a workable mixture of flexibility, discipline and solidarity". But what, M.Wolf does not say is that this experiment requires a revision of the institutional setting in Europe. 

Nicolas VĂ©ron, a senior fellow at Brussels-based think tank Bruegel points out : "A meaningful upgrade of EU institutions is a necessary condition for the eventual resolution of the Greek problem. (...) "There is no easy or quick way to solve the euro area’s complex equation, but one thing is sure: the status quo, even with the European Stability Mechanism and the fiscal compact, is unstable and unsustainable. The market lull must be used by leaders to prepare the next steps. Otherwise it will be another missed opportunity." 

The fiscal compact - agreed at the EU Council on 1-2 March ( with the exception of the United Kingdom, Czech republic and Ireland which will vote in a referendum -  represents a  transfer of sovereignty to the EU to control fiscal discipline , the largest since the Maastricht Treaty. It is the expression of the German ideology on financial rigour through which it imposes its power. But it does not represent true fiscal integration - which requires an effective coordination both on expenditure and taxation. In this regard, the proposal of a financial transactions tax (FFT) has an essential role. If it is implemented in a coherent manner, the eurozone countries will reduce the influence of financial markets and on the other hand, acquire one of the attributes of sovereign power, which is to levy taxes. The problem is that if a supranational political authority is set up to govern the eurozone, there will be another dilemma, that is the possibility to create a sovereign pan-european power to limit the market excesses but without a democratic legitimacy. 

Europe will evolve through its internal contradictions. The resolution of the Greek crisis is only a first step in the direction of a greater political unity with a coordinated fiscal policy to boost growth and jobs. 

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