Πέμπτη, 9 Ιουνίου 2016

The eurozone cannot escape political and fiscal union


5/6/2016

By  Wolfgang Münchau

The idea of crisis resolution through insurance suffers from an internal contradiction

If your only tool is a hammer, every problem is a nail. It is no surprise, then, that many economists regard the problem of the eurozone as essentially one of insurance — a technical problem in need of a technical fix. No prizes for guessing which profession will be employed to solve it.

An insurance-based approach involves doing the least amount of integration necessary. It would not need full-blown political or fiscal union, but merely a few additional backstops to insure against banking crises or shocks affecting some members but not others. If a crisis hits, the insurance kicks in.

The idea is not entirely stupid but the idea of insurance as an alternative to political union is wrong.

Implicit in any economic model of insurance is the presence of a legal framework, and of a state that ensures the insurance pays out or protects against fraud. Since such legal frameworks exist in most countries, there is no need for economists to care much about legal enforcement.

But we are dealing here with insurance among sovereign states. There is no state above them that can impose legal certainty. Insurance can be regulated through multilateral contracts or treaties but these can be unilaterally rescinded. Most western states have a rule preventing parliaments from making binding commitments on their successors. An insurance contract between states would violate that principle.

The idea of crisis resolution through insurance suffers from an internal contradiction. The intention is to create something lighter than a political union, but you need a political union to provide the legal and political framework to make insurance possible.

Take the example of a pan-eurozone deposit insurance, favoured by the European Central Bank, the European Commission and the majority of member states — but not by Germany. From Berlin’s perspective, there are two arguments against it. The first is that it is not insurance at all but a hidden transfer. Since the banks of the southern member states are in worse shape, it is clear that any payout would be from the north. Asking for deposit insurance now is like buying car insurance after an accident.

The second argument is that intrastate insurance is not fundamentally different from a joint debt instrument — the eurobonds the Germans loathe so much. Insurance, too, is a form of joint liability; if one country is hit by crisis, the rest of the union will help. Insurance is technically different from a bond but it also entails shared responsibility.

My guess is that advocates of insurance underestimate the intelligence of German policymakers. It has happened before. I recall a proposal early in the eurozone crisis when Brussels-based economists proposed “stability bonds” — eurozone bonds by another name — to make it more attractive to the Germans, given their penchant for “stability-oriented” fiscal and monetary policies. The idea that the likes of Wolfgang Schäuble, the German finance minister, cannot see through this is absurd.

Advocates of insurance-based systems also tend to ignore an important political reality. If you want to co-opt Berlin into writing an insurance policy for you, then you will have to accept a loss of sovereignty. And the only place to which any sane person would want to transfer this sovereignty would be a political union, not the German state.

My conclusion is that there is no way around a political and fiscal union in the long run, even if the idea is growing less fashionable. Without it, I see no counterweight to a rise in German power in the eurozone and no end to the rise in intra-eurozone imbalances. The German current account surplus was almost 8 per cent of economic output last year and is still rising. Without a political union, there is a risk that at least one southern member state, probably Greece, Portugal or Italy, will opt to drop out of the eurozone. Even in Greece opposition to the euro is growing.

There are many technical ways to make the eurozone sustainable in the long run, and insurance is a perfectly legitimate idea. It may be an alternative to joint debt instruments but not to a political and a fiscal union.

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