There are intense discussions between Berlin and Paris regarding a comprehensive solution to the debt crisis. This time, the leaders are discussing a possible quantum leap in European integration: a fiscal union.
The talk about a fiscal union could hide less union: those who break the rules could leave the common currency or be thrown out. Here is a possible German-French compromise that may not be big step forward for European integration, but could be a big step forward in resolving the debt crisis.
Fiscal Union?
A common management of finances could enforce more responsible budget management and less deficit. A European treasury might be too far reaching, but there’s another idea in the works: national budgets could be rejected by the EU.
The public doesn’t like losing its grip over power. Approving such changes takes a long time and it won’t necessary pass.
There’s another treaty change that can be more popular: an exit mechanism from the euro.
Greek Dead End.
There is a growing gap between different countries in the euro-zone. Trying to sustain Greece’s debt is not only “mission impossible”, but also bringing down other countries.
A euro-zone with countries of a more similar profile could function better. By leaving the euro-zone Greece could finally default on its debt, enjoy more competitive exports and tourism and start growing again.
The current framework doesn’t consist of an exit mechanism. The EU 27 or the euro-zone 17 cannot expel any country out of the zone.
While discussing the future of the European Union towards more integration, talk about disintegration of some countries could also be discussed.
Germany Releases the ECB?
Germany wants a stronger economic role for the EU – more power to Brussels and refuses to use the ECB to solve the situation by printing money and buying bonds.
Yet the ECB already understands that it may play a bigger role. Talk about a 1 trillion euro move already floated.
France doesn’t really like handing over sovereignty to Brussels, and wants to keep its banks stable. French banks are heavily exposed to Greece. If French banks get into trouble, the French government will help them and will likely lose its perfect AAA credit rating.
These two countries, Germany and France, may find themselves in a compromise that will include:
- A mechanism to expel countries out of the euro-zone.
- A Greek exit of the euro-zone.
- A plan for Italy which includes an austerity program and ECB assistance with debt.
- Greater ECB role in stabilizing European and especially French banks.
- No fiscal union nor a “European Treasury”.
This is a critical week for the euro-zone and for the whole European project. Will the leaders find a solution?
Further reading:
- Greece Leaves the Euro-Zone? This Could Solve So Many Problems – The advantages for the split.
- Failed German Auction Paves Way for Euro-Zone QE – The bond rout reached Germany.
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