Stephen King: The eurozone must replace its blank cheques with some real representation
Economic outlook: Faced with the loss of fiscal sovereignty, governments could more easily sell 'local austerity' rather than 'Brussels austerity'
Monday 04 July 2011
The principle of "no taxation without representation" is, as any American will tell you, a useful one. If the eurozone crisis is to be resolved, Europe's leaders need to take heed. For all the talk of bailouts, blank cheques and burden sharing, the euro's problems ultimately won't go away until appropriate political arrangements are established between the eurozone's creditor and debtor nations. Otherwise, following the example set by 18th-century Bostonians, tea parties will be held all over Europe.
So what political arrangements might work? If the end result is fiscal transfer between the member states of the eurozone – which is where we're heading with continuous bailouts – the system will surely eventually melt down. It's difficult enough having fiscal transfers between northern and southern Italy or between England and Scotland. How on earth, then, could German taxpayers, for example, ever agree to work until their late 60s to fund Greeks retiring at 55?
There may, however, be an option that, paradoxically, respects national sovereignty (most of the time) while accepting the "no taxation" principle so beloved of the 18th-century Americans. Take a step back. In the dark days of 1992 and 1993, in the midst of the European Exchange Rate Mechanism (ERM) crisis, few concluded that the persistent financial turmoil would lead to the creation of a single currency. Yet the crisis imposed a choice that, previously, could be neatly put to one side: did the countries of Europe want to have their own separate currencies with all the associated financial upheavals or, instead, did they want to pool their sovereignty with the creation of a single currency? Most went for pooling. The UK, of course, headed in the opposite direction.
Today's crisis could be the opportunity to impose a similar choice. As things stand, the euro is failing. Its failure stems from a debt crisis for which no one is prepared to take responsibility. The creditors want to impose crippling austerity on the debtors to protect their own interests. The debtors make potentially hollow promises to the creditors, knowing that the creditors would rather offer blank cheques than be held responsible for a systemic financial collapse. And the markets, meanwhile, scent blood, only too aware of the lack of political leadership.
The choice today should be as clear as it was in the mid-1990s. Either nations become members of a newly formed fiscal club – an extension of the pooled sovereignty associated with the euro – or they exile themselves to the outer fringes of the eurozone: euro-ised but no longer fully paid-up members of the single currency. The fiscal club would have clearly defined rules. Countries would retain their fiscal sovereignty most of the time. In the event of a fiscal crisis that left them short of funds in the market, they would be able to turn to their European partners. By doing so, however, they would be required – temporarily – to sacrifice their fiscal sovereignty.
The partners would offer loans at rates which took into account the miscreant country's fiscal position. If, for example, the country had no prospect whatsoever of economic growth yet nevertheless had to deliver massive austerity, it would receive loans on an interest-free basis, thereby short-circuiting the problems – no growth, high interest rates on existing debt – that have put Greece and others on the road to perdition today. But these generous loans would come at a significant political cost. For the duration of the "bailout", the miscreant country's fiscal policy would be set not by its own finance ministry but by the good men and women of Brussels.
In other words, a political "switch mechanism" would be established. Well-behaved countries that ran fiscal surpluses in the good times and modest deficits in the bad would never have to be bailed out.
Those who misbehaved, however, would discover that, during the bailout phase, there would be "no European taxation without European representation", thereby overcoming the obvious problem with a fiscal transfer union established across national borders.
The "switch mechanism" would also offer a powerful incentive for good behaviour. Governments with weak fiscal positions, faced with a potential loss of fiscal sovereignty a few years down the road, could more easily go to their people and persuade them to accept "local austerity" today rather than the ignominy of "Brussels austerity" tomorrow. By having a clearly defined and credible threat, the nonsense that has unfolded in recent months – endless negotiations with no ultimate resolution – would be a thing of the past.
Euro exile would similarly be based on the "no taxation" principle. Specifically, those countries opting out of the fiscal club would no longer be able to rely on fiscal support from their European partners. And because fiscal support these days comes with monetary backing, the opt-out country would also be unable to rely on the deep pockets of the European Central Bank's balance sheet. It might even relinquish its seat on the ECB's governing council.
The country could, of course, still use the euro (in the same way that Panama and Ecuador use the US dollar) but it would be very much on its own – despite their use of dollars, neither Panama nor Ecuador features heavily in the US Federal Reserve's monetary deliberations. The risks of contagion across the eurozone that exist today would thus be removed. The "opt-out" country would not be able to draw on the support of others: if it failed, its failure would be self-contained, with no obvious threat to countries within the fiscal club.
The only thing then required would be a timetable, a repeat of the mid-1990s countdown towards the birth of the euro. During the countdown phase, countries would have a chance to get their fiscal houses in order. Generous bailouts – choreographed restructurings, perhaps – could be provided. But, ultimately, national governments would have to make a choice. And, by making the choice, they would be obliged to reveal their true colours.
The choice might not be easy but it would at least force the people of each country, in an appropriately democratic fashion, to reveal how much they truly supported the principle of "no taxation without representation" and how much they supported the euro's long-term future. And by providing each country with a choice, the eurozone and its fiscal club would have far more political legitimacy than today's arrangements can possibly muster.
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