Saturday, April 26, 2014

Fiscal Colonialism

Philippe Legrain (former head of analysis at BEPA, the Advisors Council of the European Commission's President)  has published a book explaining why the Eurozone is still in a mess. He developed these ideas in a recent article published in NYT  (April 21) where he denounces the 'eurozone fiscal colonialism". 

"The primary cause of the crisis was the reckless lending of German and French banks (both directly and through local banks) to Spanish and Irish homeowners, Portuguese consumers and the Greek government. But by insisting that Greek, Irish, Portuguese and Spanish taxpayers pay in full for those banks’ mistakes, Chancellor Angela Merkel’s government and its handmaidens in Brussels have systematically privileged the interests of German and French banks over those of euro zone citizens.”

How to get out of the mess?  Legrain proposes a change of policies and institutions for the eurozone.  

"Banks need to be restructured and unbearable debts written down. More investment is needed, along with bold reforms to boost productivity.The “no bailout” rule should also be restored. Elected national governments must have much greater flexibility to tax and spend as they please, constrained by markets’ willingness to lend to them and ultimately by the possibility of default. A mechanism for the orderly restructuring of sovereign debt should be established for that purpose.To avoid future panics, the European Central Bank’s role as a lender of last resort to solvent governments should be enshrined. The mechanism for restructuring failed banks also needs to be properly independent. In the long term, a euro zone treasury accountable to both European and national legislators should be created, with limited tax-raising and borrowing powers, including an accountable  eurozone treasury, an enhanced role of the ECB, restructuring of the banking sector"  

A blueprint for change. Just one question: why not a fiscal Union based on a much bigger EU budget with real fiscal powers and a system of permanent transfers like in any federation. But this would require a political Union? This should be the final aim, isn't it?

P.S: As Robert Frost said,  "The strongest and most effective force in guaranteeing the long-term maintenance of power is not violence in all the forms deployed by the dominant to control the dominated, but consent in all the forms in which the dominated acquiesce in their own domination" 

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