From Sovereign Debt Crisis To Fiscal Union And Beyond...

[Extradry Martini]

Some of us have been talking about fiscal union as a solution to the sovereign debt crisis for many months. There is good reason to think that it could lead to to a federal Europe. Here's why:

The only way you can fix this crisis is by creating some system of cross-guarantees (either through e-bonds or simply as guarantees). If you do that, you have created a basic form of fiscal union.

It is very easy to see how fiscal union can evolve to more sophisticated levels from that point onwards: First, think about what you might need to do in order to persuade the people of Northern Europe to take this path. One of those things would be a harmonisation of social policy so that, for example, Germans are not retiring 10 years after Greek people. Once you've harmonised social policy, then what is the point of having separate social security departments? - much better to have a single one using pooled funds. You've just moved up a notch in the range of possible fiscal unions.

To begin with, social security funds would be pooled according to domestic distribution needs, but at some point thereafter you could see a quiet shift in the pooling technique for them to be pooled according to tax receipts. Once you've done that, you've moved from a basic fiscal union to automatic fiscal transfers.

Around that time, you will need (not least because the German Constitutional Court will demand it) to increase the electoral legitimacy of those controlling the social security dept. and the other common institutions such as the Commission itself. This electoral legitimacy will eat into, and perhaps surpass (given the scope of the electorate) that of national governments, meaning that some tax revenue is more properly raised at EU-wide level and decisions over foreign policy and defence etc are also best taken by commonly elected officials.

That is how you get from here to a federal Europe. Nothing wrong with it either really, as long as those who wish to stay out can do so, but staying out is unlikely to be an option for the periphery. Either way, what is about to happen in Europe now will be the biggest change since the Treaty of Rome itself. Europe moves ahead through crisis - this is the biggest crisis for the EU since it began - now watch its biggest transformation...

[piece of paper]

Yup. One can see the attraction of invasion and conquest. Far less paperwork.

p-o-p

[aa3]

Yes another moment of truth is close now. The imbalances of their system are now so large that it is bringing down economies of entire countries. The only solution I can see in the long run that keeps the nations together is a real fiscal union. There already seems to be a defacto guaruntee of all Euro national debt. Realistically they cannot let one country even partially default, because that would set off a chain reaction across the Eurozone.

So if I was already defacto guarunteeing someone's debt, I would want control over how much debt they could take, and possibly even what they were spending the debt on. And as we've seen the really imortant thing, regulations on their private banks, on a Euro level. Considering ther Euro countries end up being liable for private bank losses in each nation.

Secondly imo in the long run they will need some sort of transfer payments. Social Security is the first one. I like your point about a unified retirement age, so northerners would actually benefit. Also a Eurowide employment insurance deal. Of course national governments could top these up if they wanted.

Next, actual free movement of people, including being able to use their qualifications around the eurozone. Right now I doubt professionals in one country are allowed to use their qualifications elsewhere. So its really only free movement of labour for the lowest end jobs. Not anything like the USA where people can move around to where the jobs and opportunity are.

To give an analogy in this great recession, Florida's economy got brutalized. But they could still rely on medicaire, unemploment insurance, welfare, social security, military spending, research spending, etc.. coming in to their state. Citizens in Florida have been moving to other staes for jobs, so not becoming a burden on unemployment and health programs, actually remaining contributors. These things adds a lot of stability and strength to America's economy.

Edited December 17, 2010 by aa3

[okaycuckoo]

Europe moves ahead through crisis - this is the biggest crisis for the EU since it began - now watch its biggest transformation...

Yes, that's the impression I've always had of the EU.

People keep saying the union needs to do something quick, but the pace has been slow and sure for sixty years.

Ireland could have been very interesting, because it's always had a national debate and popular vote over big changes. But it looks like no choice there, I guess because people are content to be led when they're not sure what it is they have to lose. Sovereignty? What does that mean to my life? Especially when it's expressed by ridiculous politicians.

So interest moves on to the much less moveable rock of Spain. And it seems the UK - apart from its predatory devaluation of sterling - is keen to support the EU and the Euro institutions for fear the City might be forced out of town. I imagine there were some home truths delivered to Osborne during the talks over the Irish bailout.

[pandora's box]

16 December 2010 Last updated at 20:32

IMF agrees 22.5bn euro loan for the Irish Republic

The eurozone stability mechanism will require a change to the EU's Lisbon Treaty - but the wording has now been agreed, diplomats say.

[Arbitrage]

Some of us have been talking about fiscal union as a solution to the sovereign debt crisis for many months. There is good reason to think that it could lead to to a federal Europe. Here's why:

The only way you can fix this crisis is by creating some system of cross-guarantees (either through e-bonds or simply as guarantees). If you do that, you have created a basic form of fiscal union.

It is very easy to see how fiscal union can evolve to more sophisticated levels from that point onwards: First, think about what you might need to do in order to persuade the people of Northern Europe to take this path. One of those things would be a harmonisation of social policy so that, for example, Germans are not retiring 10 years after Greek people. Once you've harmonised social policy, then what is the point of having separate social security departments? - much better to have a single one using pooled funds. You've just moved up a notch in the range of possible fiscal unions.

To begin with, social security funds would be pooled according to domestic distribution needs, but at some point thereafter you could see a quiet shift in the pooling technique for them to be pooled according to tax receipts. Once you've done that, you've moved from a basic fiscal union to automatic fiscal transfers.

Around that time, you will need (not least because the German Constitutional Court will demand it) to increase the electoral legitimacy of those controlling the social security dept. and the other common institutions such as the Commission itself. This electoral legitimacy will eat into, and perhaps surpass (given the scope of the electorate) that of national governments, meaning that some tax revenue is more properly raised at EU-wide level and decisions over foreign policy and defence etc are also best taken by commonly elected officials.

That is how you get from here to a federal Europe. Nothing wrong with it either really, as long as those who wish to stay out can do so, but staying out is unlikely to be an option for the periphery. Either way, what is about to happen in Europe now will be the biggest change since the Treaty of Rome itself. Europe moves ahead through crisis - this is the biggest crisis for the EU since it began - now watch its biggest transformation...

Astroturf alert.

I wouldn't be so sure that the plebs will accept:

- debt slavery

- loss of democracy

- on-going double bubble bonuses for the banksters and lawyers

My bet is that there'll be social unrest.

The EU is more likely to break up, rather than integrate still further. This is what the people will want. And this is what the people will get, either through the ballot box, or via rioting until politicians listen.

[interestrateripoff]

16 December 2010 Last updated at 20:32

IMF agrees 22.5bn euro loan for the Irish Republic

The eurozone stability mechanism will require a change to the EU's Lisbon Treaty - but the wording has now been agreed, diplomats say.

That will be in a way so that they don't trigger a referendum anywhere. Isn't democracy great.

[Nationalist]

I discussed this on my blog (here) a few days ago. I don't think you have to harmonise social policies to merge the bond markets - you just need to get the Germans to accept a few points more on their bond yield. The basic idea would be no local bonds, only euro-bonds issued from Frankfurt - countries forfeit their right to borrow and finance their deficits by begging nicely to the ECB.

[DabHand]

Fiscal Union = formalising the bailout of the PIIGS by the rest into a continual formalised process, a la USA.

Good luck convincing the Germans to enter into handing out their own hard earned money in perpetuity. Good luck getting the recipients to change in order to harmonise conditions. Greeks working another 10 years before retirement? How many decades you going to need to phase that in then?

Welcome back btw EDM.

[Arbitrage]

Fiscal Union = formalising the bailout of the PIIGS by the rest into a continual formalised process, a la USA.

Good luck convincing the Germans to enter into handing out their own hard earned money in perpetuity. Good luck getting the recipients to change in order to harmonise conditions. Welcome back btw EDM.

And that's the problem.

Whilst there's democracy the Germans will carry on voting until they get a government that stops this nonsense

[Scott Sando]

2011 the year the Euro/dollar died.

[leicestersq]

Fiscal Union was always the objective of those who set up the Eurozone.

They knew that they could not create it directly, but they did realise that fiscal union might be created out of a sovereign debt crisis that would inevitably result if you took away the ability of state governments to create their own money.

Great foresight.

They also knew that fiscal union wasnt a foregone conclusion when the crisis arose. It might be possible to create it, it might not, it depends on how the political wind is blowing. They knew though, that without a eurozone and a crisis, fiscal union would never be possible.

I kind of hope that they go for it. I hope a lot more, that we leave the whole enterprise.

[wonderpup]

You can't have erosion of national sovereignty and strong democracy at the same time- these are mutually exclusive objectives. The genius of the EU elite has been their ability to obfuscate this reality and sell the EU as a 'democratic' project.

But here is where the shite hits the fan- the crisis will be used to make the argument that sovereignty will need to be sacrificed to expediency- will the decades of propaganda be sufficient to convince the peoples of Europe that their future is safe in the hands of unelected and unaccountable Eurocrats?

Disaster capitalism at it's finest will soon be on display.

[ParticleMan]

Some of us have been talking about fiscal union as a solution to the sovereign debt crisis for many months.

Quite.

One of those things would be a harmonisation of social policy so that, for example, Germans are not retiring 10 years after Greek people. Once you've harmonised social policy, then what is the point of having separate social security departments? - much better to have a single one using pooled funds. You've just moved up a notch in the range of possible fiscal unions.

Interesting approach - and ditto what remains of transport (roads, rail, and sea port construction) and defense budgets.

Cost reductions from these at the national level might make the whole tri-part pill a little less bitter...

On the down side the "current" crisis as I see it is merely the long run effect of enforcing a monetary yoke on populations with wildly varying attitudes toward risk, and wildly differing productivity levels.

Adding a fiscal yoke to the mix (without first addressing either of the constittuent parts) will merely ensure a 30's-esque depression in my view.

After all, if you can no longer short the currency OR the gilt, what's the likely outlook for employment and asset prices?

[Arbitrage]

Quite.

After all, if you can no longer short the currency OR the gilt, what's the likely outlook for employment and asset prices?

Asset prices? No problem; bond prices will hold up fine with a bit of QE.

Simples

Edited December 18, 2010 by Arbitrage

[ParticleMan]

Asset prices? No problem; bond prices will hold up fine with a bit of QE

If you take away the national-level tax breaks and other subsidies that have been keeping these economies ticking over during the recessionary half (and dramatically boosing participation rates and direct and indirect investment flows during the expansionary half) - what are the factories worth?

Fixed asset prices will need to fall a lot farther than they already have before the case for labour-intensive industry starts to stack up.

And in the mean time, unemployment soars.

If this scenario sounds familiar, it's because it is - it's what one might term a 30's-esque Depression...

[mdman]

This thread is a democracy-free zone

[Democorruptcy]

Wouldn't it help trade if the EU all spoke one language?

It could be say..... German. Any country that didn't want to help the cause could always be ejected.

[indirectapproach]

Fiscal union will be as structurally flawed as currency union for as long as the Southern Europeans spend more than their Northern brethren can afford.

Fiscal union won't fix anything because if a mob of Hun goose step into the European Finance Ministry Bureau in Rome and say,

"Right you lot. You're all nicked for tea leavery,"

All the Eyeties will screech,

"Godwin, Godwin, Godwin,"

And the Hun will have to go home.

And since the Hun cannot prevail upon his little Southern buddies to behave, he can Anschluss his way out or maybe it's easier for him to just become Southern and just go with a Southern European deflationary gig.

That's what Southern Europe's been doing since Diocletian, pretty much and let's face it, I bet Crete's more fun than Kiel.

So it looks like Anschluss or monkey money to me.

[stormymonday_2011]

You can not have a successful monetary or fiscal union without the political institutions to make it work. These simply do not exist.

Whether you look at the Roman Empire, the creation of the UK between 1707 and 1801 or German unification in 1871 there was a real centre of political power driving the process. When that centre of political power does not exist or is weak then Europe tends to fragment into its component parts. This has happened time and again throughout European history so its not as though the problems are not known. The EU also lacks the linguistic and cultural glue that would help hold it together. There is no equivalent of Latin and the medieval Catholic church to draw the whole together.

As always the EU project is an intellectualist fantasy that has the cart 10 kilometers in front of the horse.

BTW anyone who has experience of the EU wide customs system (ECMS in the UK) will know that it is far easier to write about fiscal union than actually to put it into practise

Edited December 18, 2010 by realcrookswearsuits

[scepticus]

Adding a fiscal yoke to the mix (without first addressing either of the constittuent parts) will merely ensure a 30's-esque depression in my view.

Well if they have managed to erect the fiscal yoke, then the road to monetisation of enough debt to keep up with the US, UK, Japan et al in the race to the bottom will presumably be open.

Any successful fiscal union implies the pigs get used to some deflation and the bosch get used to some inflation.

[scepticus]

This thread is a democracy-free zone

you get to vote with your pounds sterling mate.

what other outcome would one expect from a civilisation which distributes goods and services via the general price level?

[scepticus]

Fixed asset prices will need to fall a lot farther than they already have before the case for labour-intensive industry starts to stack up.

There is no case to restart labour intensive industries in places like Italy which are shortly to see historic population declines.

[okaycuckoo]

Exactly - the Reformation itself was a rebellion of fiscal transfers from the Teutonic kings to the Latins who ran the successor to the Roman Empire, the Catholic church. Been going on an awful long time.

You're forgetting about all that Spanish silver - much better explanation than the fiscal church-bash. I reckon Spain is the best model for US decline - they lavished the specie on northern Europe to buy imports while domestic production withered away. They spent decades identifying the problem, suggesting remedies, and declining all the time even as silver supply increased. Finally northern Europe got too uppity. Went on for about 100 years, but the crucial bit took 20 years, ending with the Battle of the Downs.

Edited December 18, 2010 by okaycuckoo

[scepticus]

You're forgetting about all that Spanish silver - much better explanation than the church bash. I reckon Spain is the best model for US decline - they lavished the specie on northern Europe to buy imports while domestic production withered away. They were also buying holiday homes in America! And they spent decades identifying the problem, suggesting remedies, and declining all the time as northern Europe finally got too uppity. Went on for about 100 years, but the crucial bit took 20 years.

Well yes, the analogy with spanish (aztec/incan?) silver is apt, but one has to remember that the spanish had not earned the potosi silver, they just found it. Certainly without that potosi silver it is arguable that the reformation would never have succeeded.

These latter day spanish are in no way comparable with those men of old.

"Brutal men these cavaliers of credit, programmer-traders and bond speculators and not to be admired despite the crosses on their flags and their claims of holy works – yet it is they who discover a New World. History is not always made by the worthy, and besides, they didn’t create the wind.

What is the land that they discover? A land which is entirely virtual in nature and which maps onto the old world almost perfectly, such that for every point of the old world a similar, connected point exists in the new, though even now most all of the new remains unmapped, Terra Incognita (awaiting the arrival of colonists). Via these links are the conquerors permitted to reach back into the old world of privilege and secrecy and pluck the riches that exist as a result of the arbitrages that abound in that obsolete reality.

The neo-conquistadors find the plunder initially rich but it doesn’t last long. The gold plucked so easily from the defenceless New World is quickly sucked back into the greedy maw of the Old World and dissiapated there, now as it was in the 15th century, merging the worlds together in the process and before long leaving the first invaders as mestizos on the periphery of the action that proceeds from there on in.

We live in a time not unlike the discovery and exploration of the Americas in the 16th century. That discovery unleashed a wave of liquidity from a place called potosi that travelled the world for another two centuries after it first began to flow and laid the foundations we now all take for granted in our institutions and ideologies."

http://liminalhack.wordpress.com/2010/11/10/liminality/