Merkel and Sarkozy Plan 'True Economic Government'

[really]

spiegel.de

Following a summit meeting in Paris, Angela Merkel and Nicolas Sarkozy have announced proposals to introduce a "true European economic government" as part of a long-term plan to battle the debt crisis. They also appear to have ruled out issuing euro bonds, at least for the time being.

Is this inevitable if the monetary union is to survive?
Would this have happened without the current crisis?

Personally I think ever closer fiscal and political union is an inevitable outcome of monetary union.

What model this will take I don't know - probably something like the USA where there are local, state and federal taxes (as I understand it) and each state has some discretion on rates and so forth. Each state may be given bands within which it can set its own taxes.

The other unknown is how long this will take to negotiate and implement - this will require new treaties, referendums etc.

Thoughts?

 

[Winner]

No Eurobonds? For how long are they going to delay the inevitable? At least the ECB has some sense left in it.

Deeper integration in inevitable if Europe is to survive, I've been saying this ever since I joined this forum, and even before. If it takes a giant crisis to finally beat this truth into people's heads, so be it.

 

[Tani Coyote]

It's a job half done for it to have a common currency but not a good deal of centralisation. Simply because diverse economic policy in a few countries will drag the whole lot down, as their poor actions punish the rest.

So... it's either centralised economic policy, or no economic policy.

 

[Mise]

Yup... The EU has always sought to solve its problems through more integration. I think it's a good move, though I'm glad the UK is very much on the outside. Go-go two-speed Europe!

 

[nonconformist]

Am I the only one who feels this is a pretty bad idea?

 

[GoodSarmatian]

No Eurobonds? For how long are they going to delay the inevitable?

2013. Then Merkel get's kicked out of office and Germany will hopefully again have a chencelor who cares at least a little bit about other things than his own party.

It's good to see again stronger integration, but the article sadly doesn't really mention many specifics beyond a European Monetary Fund, a (overdue) financial transaction tax and the "possibility of a unified corporate tax rate some time in the future".

 

[really]

http://www.bbc.co.uk/news/business-14555275

To tackle concerns about high levels of debt among eurozone governments in general, Mrs Merkel also proposed that a requirement for member states to balance their budgets should be enshrined in each of their constitutions.

In another initiative to increase tax revenues, the leaders advocated harmonising corporate tax rates across the single currency.

The two leaders also said they wanted bi-annual meetings of the 17 heads of the eurozone governments, chaired by Herman van Rompuy, the current president of the European Council.

Three other suggestions are balanced budget amendments, harmonised corporate taxes and regular Eurozone meetings.

 

[Mise]

Will the corporate tax rates apply to Ireland as well? They fought pretty hard to keep theirs low, would be strange if they agreed to it now.

 

[GoodSarmatian]

I'm pretty much on the supranational side of european integration, but tampering with the member states' constitutions goes too far and probably violates EU treaties.

 

[Mise]

Well I'm assuming it would be "voluntary", meaning the Eurozone couldn't force its members to adopt anything so fundamental to national budgetary sovereignty. But we all know the diplomatic carrots and sticks that will be employed now to get all states to agree to it. The horse-trading and the back-room deals. Starting to sound more like America already

 

[bathsheba666]

More waffle from Sarkozy and Merkel ?

Why haven't the markets unwound already ?

 

[Godwynn]

I've been hearing gossip that Merkel and Sarkozy want to propose a financial transaction tax. I have no article links as of yet.

 

[mitsho]

Merkel is bound by interior politics (the constitutional court), that's why she is delaying the eurobonds and this is what makes the Germans the unwanted (by themselves) emperors of Europe right now: The Constitutional Court which could theoretically cancel the whole thing.

As for the general idea of more integration. I guess it's inevitable, but personally I'd like to see more deepening before broadening it to other areas. Of course I say this as a unwilling outsider... (deepening = more democratic control, more input-legitimation [as opposed to the output-legitimation of "see, the euro is doing well"]). The Europe of Two-Speeds is a really bad idea, because in the end, the slower speed has to catch up (if the european idea has any merit), and they will not hack new streets through the jungle, but follow the established ones, thus the faster going Europeans practically decide the shape...

 

[Leoreth]

2013. Then Merkel get's kicked out of office and Germany will hopefully again have a chencelor who cares at least a little bit about other things than his own party.

While I think Merkel is doing this for the wrong reasons, they do have a point.

In many countries the debt problem started because they were able to get cheap credits much easier after they've entered the Eurozone. Many governments only started to act after the markets forced them to via higher interest rates. It wouldn't surprise me at all if the PIIGS would continue as before after they're able to get cheap credits again with Eurobonds.

That said, I sympathize with the SPD's proposal of Eurobonds only until a certain percentage of debt per GDP, but knowing how the EU works, that would likely be watered down at some point or be subject to some kind of fraud anyway.

It's good to see again stronger integration, but the article sadly doesn't really mention many specifics beyond a European Monetary Fund, a (overdue) financial transaction tax and the "possibility of a unified corporate tax rate some time in the future".

That's all well and good, but it would be even better if these things would gain some additional legitimacy through truely democratic institutions instead of being the product of deals by the heads of governments of involved nations.

 

[Dreadnought]

Integration doesn't mean diddly squat unless they get the situation under control; who knows, maybe it'll just mean they all go down as a team.

 

[GoodSarmatian]

That's all well and good, but it would be even better if these things would gain some additional legitimacy through truely democratic institutions instead of being the product of deals by the heads of governments of involved nations.

The european parliament is a truly democratic institution (or as democratic as national parliaments) and it has become more powerful with every treaty but people don't seem to care. Turnout is notoriously low and most times people just vote for the opposition of their national governments because they are not content even though the EP doesn't have much to do with national politics.
It's no point making the EU more democratic if people keep ignoring the democratic elements it already has.
And then there's always the point to be made that the national governments are democratically legitimised to make these deals.

 

[Leoreth]

The european parliament is a truly democratic institution (or as democratic as national parliaments) and it has become more powerful with every treaty but people don't seem to care. Turnout is notoriously low and most times people just vote for the opposition of their national governments because they are not content even though the EP doesn't have much to do with national politics.
It's no point making the EU more democratic if people keep ignoring the democratic elements it already has.
And then there's always the point to be made that the national governments are democratically legitimised to make these deals.

I'm surprised you call a parliament that values the vote of a Maltese voter more than 12 times more than that of a French one democratic.

That the EP is usually ignored is unfortunate, but largely the EU's own fault, when all major decisions are made by national governments and only a few of them have to throw a tantrum to halt everything.

In my opinion it's childish to complain that the citizens don't participate when the institutions haven't proven to be worthy of participation.

 

[kronic]

You guys do realise that this plan is a pile of crap?

1) "Economic government" - not more than another institutionalised chatting club with that Rompuy guy as head. Maybe nice, maybe not but nothing that changes anything.

2) Transaction tax - Generally an instrument that in my opinion should be part of any great plan to reform the international financial system. But it will do nothing to sort out any of the Eurozone's current problems. The EU may get some revenue but that's about it. Nice, but not pressing at all for now.

The real cracker is 3), the debt brake for every member country that I think is going to be disastrous for Europe's economy. Let's go through it. Remember that the Eurozone already takes away any flexibility in terms of monetary and currency policy from its members. Now they're taking away fiscal policy as well. As monetary policy cannot suit all, possibly not even a few countries really well, national governments desperately need fiscal flexibility to soften the consequences of unfitting monetary policy. This door is now to be closed. A sensible coordination of fiscal policy would involve exactly the opposite, i.e. allowing for a combination of expansionary fiscal policy in some countries and more cautious fiscal policy in others depending on the macroeconomic situation of member countries and the Eurozone as a whole. If we get that debt brake for everyone the only tool available to adjust for differences between member states is wage policy. Of course, wage policy is a) harder to change for a government as it's mostly decided by employers and unions and b) only allows for small changes in a short period of time. In other words, wage policy is relatively inflexible by nature. I'm sure it's easy to see what it means to force such a rigid scheme of governance on a currency area with 17 very different economies and provide no tool for national adjustment at all.

European leaders still seem to believe that Europe can be rescued by cutting whereas the real problem is the utter lack of growth. If there's any way left to avoid bankruptcy than it is creating higher GDP than debt growth. Every measure they take, and that debt brake proposal adds to that, leads away from such a path. You can't stabilise the debt of heavily indebted countries if GDP flatlines. Has anyone ever studied fiscal policy under the German chancellor Brüning and its economic consequences in the early 1930's? That's what we're heading for. And some countries are probably already beyond the point where they could be saved.

If the other 15 members really are stupid enough to accept this proposal and put it into their constitutions, thereby giving up any control over fiscal policy, they'll be able to mount even more pressure on Germany on the issue of Eurobonds. And Merkel will be able to say to German citizens "Look what measures the other countries did. They will be prudent from now on." and try to sell Eurobonds to the German public on that line.
While a lot of people here (on CFC) seem to be enthusiastic about it, they seem to overlook that they'll do NOTHING to adress the lack of growth in the troubled countries and thereby not adress the underlying problems of the Eurozone (i.e. the large structural imbalances). The only thing they do in this situation is buying a little more time. That little more time will come with a high price tag: 1) Markets will question whether Germany can guarantee the Eurozone's entire debt (of course, it can't - just look at the size). 2) Debt costs for Germany will rise significantly and thereby force another round of austerity on Germany with consequences for both German and Eurozone growth. 3) Inivite moral hazard on an unprecedented scale. 4) Alienate the German (Dutch/Finnish/etc.) public ever more from the Eurozone because it is really nothing more than a sellout of Germany for a little more time.

This really is a terrible plan. It brings the single currency zone one step closer to collapse. Everyone who supports it should really think it through.

 

[kochman]

spiegel.de

Is this inevitable if the monetary union is to survive?
Would this have happened without the current crisis?

Personally I think ever closer fiscal and political union is an inevitable outcome of monetary union.

What model this will take I don't know - probably something like the USA where there are local, state and federal taxes (as I understand it) and each state has some discretion on rates and so forth. Each state may be given bands within which it can set its own taxes.

The other unknown is how long this will take to negotiate and implement - this will require new treaties, referendums etc.

Thoughts?

Well... as you say... eventually it would seem like the EU would have to become like a
USA if it is to survive...
However, the USA was founded young and small, then grew to what it is together more or less together, same language, etc.

Europe has hundreds of years of amazing history, culture, language, etc that seems to me to preclude a USA type of union in the end.
The bottom line is, Germany will get tired of bailing out (fill in nation or nations here)...

 

[GoodSarmatian]

I'm surprised you call a parliament that values the vote of a Maltese voter more than 12 times more than that of a French one democratic.

I call it a necessary compromise, otherwise Malta wouldn't count anything in the EP.
The EU is all about compromise and horse trading. The current systems looks unfair to many people but the political reality is that no state smaller than Spain would have agreed to anything else.

That the EP is usually ignored is unfortunate, but largely the EU's own fault, when all major decisions are made by national governments and only a few of them have to throw a tantrum to halt everything.

In my opinion it's childish to complain that the citizens don't participate when the institutions haven't proven to be worthy of participation.

You're right. But it also makes no sense to give more power to a parliament that is largely ignored by the voters. It will take a lot of time and many little steps to transform the EP into a real parliament.