Monday, 29 November 2010

Total fiscal union?

So Ireland have had their bail out. There's no guarantee it will last. Irate Irishmen are known for blowing things up. They may still walk away from the deal after signing, say in a few months when the inequities highlighted in my previous post are better known.

Next fiscal basket-case in the bond markets' cross-hairs is Portugal. Eleven million people (compared with the ROI's population of 4.5 million) but much the same GDP. The Portuguese are poor! 200,000 of them eat out of soup kitchens. That's serious poverty.

Then after Portugal is bailed out (basically by the Germans) attention will switch to Spain. Spain is economically six times larger than Portugal; in population terms four times larger. Spain is richer, but that's bad because it means Germany cannot afford to bail out Spain. No-one can afford to bail out Spain. If Spain needs help the euro is toast.

So how to stop it getting that far? Well, the answer is total fiscal union. Instead of there being Irish bonds and Portuguese bonds and Spanish bonds and German bonds - merge the lot. Henceforth there are only eurobonds, issued by the European Central Bank in Frankfurt. Then the bond markets cannot pick on weak members of the eurozone.

But how does that work? Some eurobonds are issued, who gets the cash? Well, that's where total fiscal union comes in. The ECB hands out the cash according to some formula. Eurozone countries no longer have any borrowing powers of their own. To borrow they must go begging to the ECB. Yields on the eurobond will be some weighted average of the existing yields. Every member country is equally responsible for the redemption of eurobonds although probably every member country will retain its existing national debt, which has to be financed with new bonds as old bonds expire. So old national bonds will continue to exist but only as a legacy product. You won't be able to buy new ones.

It could just work! It does involve a massive transfer of sovereign power to the EU though. The participating eurozone states would be reduced to a status equivalent to American states vis-a-vis their Federal government. Frankfurt would be telling them how much they can spend in the future. (Another apt analogy would be the relationship between Scotland and London. Scotland decides how to spend the money, but London tells them how much they can have.)

Does every eurozone state have to join this fiscal union? Well, all the weak ones have to, Ireland, Portugal, Spain, Italy, Greece. If Germany doesn't join there's no point. France might try to stay out, but the German public would be a bit pissed off if the French aren't seen to be pulling their weight. The smaller euro users would probably be bullied in, eg Malta. In practice if a few smaller euro nations wanted to stay out of the union it probably wouldn't matter. They would be paying a premium in the bond markets for their independence.


Anonymous said...

Great post! This solution is ideal for europhiles, it deepens integration, erodes national sovereignty and is technical enough to bemuse the proles; so they won't fight back.

The Irish Yes vote was achieved by linking financial stability with a closer Europe, I'm sure national politicians would be able to pull off the same trick with this. They might not even need a referendum.


Nationalist said...

Yes, it's enough to make a europhile salivate in anticipation. Europe rides to the rescue and proves that the problem all along wasn't too much integration, but not enough.

Anonymous said...

Have a DYNAMITE day my friend!

Anonymous said...

Is this actually your idea? Or has it already been mooted in the popular press?

- Dumb American

Nationalist said...

It's not my idea but it hasn't reached the mainstream media yet. It has always been a step on the path to the United States of Europe.

The Germans are currently blocking it because it would make their borrowing more expensive.

Anonymous said...

Don't worry I'm sure WikiLeaks will publish it soon :-)

- Dumb A

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