First published: Financial News, 28/06/2010
The euro crisis has dropped off the front page, so to speak, but it won’t go away, and is liable to erupt again. In the medium-term, this is because Europe’s sovereign debt problem is an existential problem. Simply, you can’t have a viable monetary union unless you also have full fiscal integration, if not complete political union.
Whether European citizens and leaders want this to happen is a moot point. At the very least, monetary union is likely to adopt a more Teutonic character. It would require that members agree enforceable, credible penalties for countries that flout the fiscal rules and that Germany, as the region’s principal creditor, also takes responsibility to support demand in the eurozone by switching its economic focus to domestic demand.
But the mood music currently is not encouraging that either will happen, especially not the latter. Germany is in a tricky position. Understandably, it resents having to be the paymaster for countries whose fiscal behaviour has been irresponsible or negligent. More critically, a viable monetary union, as it stands, won’t happen unless it, too, embraces economic reforms to help reduce imbalances within the eurozone.
In the short term, though, European leaders could take a big step towards making the crisis more manageable by addressing what is, away from the headlines, a second act of the banking crisis. Even before …more