Euro crisis: “there is no unity at present in the euro zone about what needs to be done”

A couple of reports in the Irish Times to emphasise a point made recently by Tim Garton Ash.  First up a quote from the German Chancellor, Angela Merkel.

“We are at the start of this work and there is no unity at present in the euro zone about what needs to be done,” she said. “We have to stabilise things first, exchange views and at a later point say what needs to be done and how, and where we have majorities.”

And from a report on the EU Finance Ministers’ meeting in Brussels

Although everyone says the commission’s proposals to intensify budgetary surveillance go in the right direction, they don’t want to erode national prerogatives. This raises questions as to how far they will travel down the road to tougher central scrutiny and “peer pressure”.

With the European authorities under pressure to seize the initiative in a crisis which has upended many of the basic tenets of monetary union, the objective of yesterday’s meeting is to significantly strengthen the euro rule book.

By kicking to touch seismic options such as restructuring, the ministers narrowed the range of measures that might be deployed to strengthen the inadequate rule book. In short, they will operate within existing provisions to cast aside the unwillingness to impose financial sanctions on errant governments. This power lies within the scope of current legal provisions but has never been deployed.

Fining a country could be a “nuclear” option. In the heat of the current imbroglio, however, it was market pressure that led Spain and Portugal to adopt tough new austerity measures. Reviewing the Stability and Growth Pact could well see the inclusion for the first time of competitive indicators such as unit labour costs and the role of expanding indebtedness in a country’s growth. That makes sense but is deeply political.

This work is complex and has exposed deep tension between competing economic traditions. From Berlin come loud demands for euro countries to adopt Germanic rigour in their budgets.

In the opposite direction flow demands for Merkel to stimulate consumer demand in Europe’s largest economy.

The debate will continue for months. The aim is to produce an interim plan for the next summit of EU heads of state and government in four week’s time with a view to final decisions by October.

Meanwhile, battles on the markets continue day by day.

Alternatively, “We all know what to do, but we don’t know how to get re-elected once we have done it.”

I’m not hearing that “voice of calm” anymore…

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  • Alias

    The markets would have sorted it all out in a few weeks if the EU didn’t create a moral hazard for states wherein they are bailed-out by the EU.

    Those states that don’t yield to austerity measures that are designed to ensure that they have sufficient funds available within their budgets to meet their debt repayment obligations to those markets would not get access to further funding, thereby providing them with a powerful imperative to balance their books.

    However, because the EU federalists created a political currency to further their “ever-closer union” agenda they also created a moral hazard which encouraged states and their lenders in the markets to act recklessly in expectation that the EU would have to bail-out any defaulting member state within the eurozone in order to protect the single currency – and its federalist agenda.

    This moral hazard, now explicit within the Euro rather than implicit, can only be controlled in future by states surrendering their fiscal sovereignty to the EU.

    The design flaws of a single currency without a state remain, however, and nothing and on-one will bail-out the Euro when one of its larger economies goes bang. What is the health of Germany’s banks? They’re the most over-leveraged and under-capitalised banks in the EU. When that old engine blows, she’ll blow the ship from stern to bow.

    At any rate, it is now the markets that are driving events with the EU reacting to market demands in regard to austerity measures rather than leading events. Without the markets panicking about the size of Debt Mountain created by the ECB’s expansionist monetary policies, the EU would be sitting around congratulating itself on what a great success economic integration was…

  • Pete Baker

    “Without the markets panicking about the size of Debt Mountain created by the ECB’s expansionist monetary policies, the EU would be sitting around congratulating itself on what a great success economic integration was…”

    Possibly…

    It is true that they aren’t exhibiting the kind of urgency that the crisis would appear to demand. As reported above

    The debate will continue for months. The aim is to produce an interim plan for the next summit of EU heads of state and government in four week’s time with a view to final decisions by October.

    Meanwhile, battles on the markets continue day by day.