EU talking about radical changes
A central financial authority that can tax, issue bonds and approve budgets is being given serious thought, writes Matthew Saltmarsh in London.
A central financial authority that can tax, issue bonds and approve budgets is being given serious thought, writes Matthew Saltmarsh in London. AS LEADERS in Europe try to contain a deepening financial crisis, they are also increasingly talking about making fundamental changes to the way their 17-nation economic union works.The idea is to create a central financial authority with powers in areas such as taxation, bond issuance and budget approval that could eventually turn the euro zone into something resembling a United States of Europe.Officials have been hesitant to publicly endorse such a drastic change. But privately they say the issue has gained urgency in recent months, as it has become clear that Europe's current approach, which requires unanimity on any significant moves, is unwieldy and inefficient. The idea is being promoted by some global financial officials, who worry about the risks that continued uncertainty in Europe poses to the global economy.Recently, for instance, when an official from a European central bank met a financial official in Washington, his host brandished the Articles of Confederation, the 1781 precursor to the US constitution, to use as an example of why stronger unions become necessary.The story of America's failed early effort to operate as a loose confederation of 13 states is looking increasingly relevant for many European officials. The lack of strong central co-ordination of the euro zone's debt and spending policies is a crucial reason why Europe has been unable to resolve its financial crisis despite more than 18 months of effort.The lack of progress has contributed to steep declines in European stocks recently, sending tremors through US markets as well. On Monday alone, several major European markets fell more than 4 per cent while markets were also down yesterday in Australia and Japan.And that is why, despite all the political obstacles, Europe appears to be inching closer to a more centralised approach, and some officials are going public on the issue."If today's policymakers want to successfully stay the course, they will have to press ahead with structural changes and deeper economic integration," Antonio Borges, director of the International Monetary Fund's European unit, said in a recent speech. "To put the crisis behind us, we need more Europe, not less. And we need it now."Nothing happens quickly in Europe, however. For the most part, such efforts are still being made behind the scenes. But several long-time financial and central bank officials and staff members said there had been a substantial step-up in planning for a closer European fiscal relationship to match the unified monetary union under which the euro zone has operated for more than a decade.For now, officials are mainly talking in generalities."The crisis has clearly revealed the need for strong economic governance in a zone with a single currency," Jean-Claude Trichet, the departing president of the European Central Bank, said in a speech on Monday, repeating earlier calls for greater fiscal discipline.Officials, who spoke anonymously because their discussions were politically charged, said a major overhaul of the way Europe conducts fiscal policy was likely to take a long time and require changes in the treaties governing the euro. But they pointed to the smaller changes that were already taking place as evidence that euro-area financial ministries see that they have little choice but to move together if they want to avoid a catastrophic breakdown.With the new bailout for Greece that was agreed on by European leaders in July still awaiting approval from each country in the euro zone, the fractionalised way that Europe runs fiscal decision-making risks setting off yet another crisis at each step along the way. Every plan requires agreement among finance ministers and the parliament of any member country can veto the deal. Many economists say that the continent's debt crisis, which began in early 2010 with the threat that Greece might have to default on its loans, could have been resolved far more quickly if there were some sort of central financial body, akin to the US Treasury Department."If they had the equivalent of the US Treasury, then this treasury could have formulated proposals with the collective objective in mind, rather than 17 national objectives competing with each other," said Garry Schinasi, a former official with the International Monetary Fund who now privately advises European central banks and governments. "Instead, they fumbled around and took two baby steps forward and three backward."The idea of a European treasury that would enforce fiscal discipline on wayward countries, while also having the power to spread European Union wealth from healthier countries to ones struggling to pay their debts, is fiercely unpopular among voters in many countries. Those in prosperous nations like Germany do not want to see their taxes used to bail out countries that borrowed their way into trouble. And those in weaker nations are reluctant to allow outsiders to dictate how their governments spend their money and tax their citizens.Europe's currency union has its roots in the agreement signed in 1992 known as the Maastricht Treaty, which set in motion the rules for creating the euro and for joining the euro zone. A later agreement established the European Central Bank, which manages interest rates much like the US Federal Reserve.But the Maastricht Treaty stopped short of telling countries how to handle spending or taxation, leaving them loose rules on budget deficits to follow or break, as many did, including Germany and France in the early days of the euro.In the US, agreements between Congress and the White House on budget measures can be extremely difficult to reach. But the European process is even more arduous.The euro zone is also moving to increase oversight of countries' budget plans earlier in the process and to give the European Commission greater power to propose financial penalties on countries that violate the rules, unless blocked by a large majority of members.