Europe inching towards fiscal union
The unresolved debt crisis is forcing change, write Louise Story and Matthew Saltmarsh.
The unresolved debt crisis is forcing change, write Louise Story and Matthew Saltmarsh. 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 endorse such a drastic change. But privately they say the issue has gained urgency, 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 officials who worry about the risks that uncertainty in Europe poses to the global economy.The lack of strong central co-ordination of the euro zone's debt and spending policies is a crucial reason 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, sending tremors through US markets.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.Nothing happens quickly in Europe, however. For the most part, such efforts are still being made behind the scenes. But several central bank officials said there had been a 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.They said an overhaul of the way Europe conducts fiscal policy was likely to take some time and require changes in treaties governing the euro. But they pointed to the smaller changes already taking place as evidence financial ministries see they have little choice but to move together if they want to avoid a catastrophic breakdown.With the bailout for Greece agreed upon by European leaders in July still awaiting approval from each country in the euro zone, the fractionalised way Europe runs decision-making risks setting off yet another crisis. Every plan requires agreement among finance ministers and the parliament of any member country can veto the deal.Many economists say the continent's debt crisis could have been resolved far more quickly if there was some sort of central financial body, akin to the US Treasury.The idea of a European treasury to enforce fiscal discipline on wayward countries, while also having the power to spread EU wealth from healthier countries to strugglers, is unpopular among voters. Those in prosperous nations, such as 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 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.The problems with this process were highlighted last Friday when talks among the Europeans, the IMF and Greece were put off because Athens was coming up short in plans for meeting budget targets.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 penalties on countries that violate the rules, unless blocked by a large majority of members.If and when that happens, said Graham Bishop, an analyst who has advised the British and European parliaments, it "would be the moment of collective control of an errant state the final step towards a de facto political union".