Euro zone faces two-class future after Greece mess

When they negotiated the 1991 Maastricht Treaty, Helmut Kohl, Francois Mitterrand and Jacques Delors believed that European Monetary Union would lead inevitably over time to a closer political union with more federal governance.

But the flaws revealed by Greece's fiscal jam seem more likely to hasten a two-class system in which “grown-ups,” led by Germany, exert ever more control over wayward “children” such as Greece, but accept no reciprocal scrutiny.

It is also possible, though less likely, that domestic politics could prevent Berlin helping rescue a euro zone member in trouble, leaving that country to turn to the International Monetary Fund for emergency funding.

Finally, it is conceivable that a euro zone state, unable or unwilling to make the sacrifices prescribed by Brussels, Berlin or Washington, could default or seek to reschedule its debts.

That would not necessarily lead to the defaulter leaving the euro area, let alone prompt the collapse of the single currency. But it would set off a chain reaction of bank solvency problems requiring emergency solutions for which the EU is ill prepared.

Option 1: Closer Euro Zone Governance

In Brussels, predictably, the talk is of the need for closer economic governance, new powers of surveillance for the European Commission and its statistics office over EU states' finances and perhaps the creation of a European lender of last resort.

Commission President Jose Manuel Barroso proposed last week giving the EU executive new powers to recommend economic reform programs to individual countries, and to name and shame laggards by sending warnings in cases of inadequate responses.

French President Nicolas Sarkozy has seized on the Greek crisis to revive ideas of a “European economic government” that would coordinate member states' economic policies and keep the euro exchange rate competitive against the dollar and the yuan.

But Germany, the biggest economy, has made clear it does not want EU surveillance of its own export-oriented policies, which generate big current account surpluses that economists say are partly responsible for widening imbalances in the euro zone.

Belgian Prime Minister Yves Leterme has advocated a European Debt Agency to issue common bonds enabling all euro zone countries to borrow at the same cost. That too is a non-starter in German eyes, and equally unacceptable to the Dutch and Finns.

Larger fiscal transfers within the EU or the 16-nation euro zone look impossible because of post-crisis retrenchment. The EU budget is just 0.9 percent of the bloc's economic output and set to stagnate or decline over the next decade.

Economists Daniel Gros of the Centre for European Policy Studies and Thomas Mayer of Deutsche Bank have proposed a European Monetary Fund to design and run IMF-style assistance programs for euro area countries in difficulty.

It would be funded initially by market borrowing and in time by contributions from states with excessive debts and deficits.

While Barroso's proposals only face political resistance, it is hard to see how the more ambitious ideas could be implemented without treaty change unanimously approved by the 27 EU states.

That seems too difficult to contemplate after years of agony to get the Lisbon Treaty ratified. So any great leap forward in economic integration appears highly unlikely.

1|2|Next Page>>

SharePrintEmail

Write a Comment

Terms

Enter your comments - 3000 characters max

Type in image code

Submit

 Receive China Post promos
 Respond to this email