After extensive negotiations, European leaders have now announced another desperate attempt to save the euro and tackle the sovereign debt crisis. Allister Heath in City AM describes the packages as “barely a draft blueprint” and “not a plan that will save the Eurozone”. George Osborne has joined eurozone politicians in their belief that the answer to their problems is a common fiscal policy.
It is a convenient answer for politicians deeply committed to political integration in Europe but it raises some pretty difficult questions. If one of the problems is that the Greeks evade their taxes, will German tax collectors be dispatched? If the challenge for Italy is a combination of high debt and low expected growth will the Estonians take on that massive debt or be let loose to impose supply-side reforms?
Economist John Kay wrote a pretty comprehensive demolition of the idea a common fiscal policy was the way forward for the Financial Times yesterday:
“Conventional wisdom holds that the eurozone problem is the adoption of a common monetary policy without a common fiscal policy. But a common fiscal policy is not necessary for a successful monetary union. No such agreement existed under the gold standard. Nor does one exist now between the US and the several countries – including China – which have pegged their exchange rate to the dollar.
Nor is a common fiscal policy sufficient for a successful monetary union. Neither the European Commission nor the German government can put tanks on the streets of Athens. The only mechanism the European Union has, or can have, for imposing fiscal discipline in any country or region is to refuse further payments to that country or region. This is precisely the mechanism that has been deployed, with limited success.
The eurozone’s difficulties result not from the absence of strong central institutions but the absence of strong local institutions. A miscellany of domestic problems – rampant property speculation in Ireland and Spain, hopeless governance in Italy, lack of economic development in Portugal, Greece’s bloated public sector – have become problems for the EU as a whole. The solutions to these problems in every case can only be found locally.”
It is worth reading the whole article. Instead of supporting their vain attempt to fight reality, George Osborne should be telling eurozone leaders they need to face up to the currency’s failure. He certainly shouldn’t let even more of our money be staked on fresh bailouts through the IMF.