The bulk of the financial troubles in the Eurozone – at least those which have become apparent thus far – have occurred in the so-called “peripheral” states, ie. small countries that are in huge financial difficulties when viewed individually (ie. Greece, Ireland, Portugal), but are small enough to be rescued by their larger brethren in the European Union. When viewed as a whole, the Eurozone had government debt to GDP of 79.2% at the end of 2009 (source: Eurostat), though this will have increased slightly since then. This compared to 83.3% in the United States at the same point in time.
The solution then, for the Eurozone, is to progress immediately from a monetary union to a monetary and fiscal union, with the European Commission in Brussels taking on the authority from national governments to issue debt, raise taxes and spend money. The new fiscal authority would then stand behind the existing debt stocks of all the national governments. The new authority would have significant financial firepower, indeed measured in terms of GDP, it would be in charge of an economy only 15% smaller than that of the United States. With such financial resources, it would be able to put in place schemes such as TARP, inject capital into problem banks, and make fiscal transfers to struggling regions, avoiding in future the precipitous declines in GDP that we have seen in struggling regions such as Ireland and Greece. I would predict that in the event of such a development, there would be an immediate tightening of credit spreads of problems states and banks, given the extra support that this would imply.
While economically and financially feasible as a solution to the current crisis, this is, of course, politically impossible. Such a transfer of sovereignty from national capitals to Brussels would be a fraught and drawn-out process, and would most likely be resisted by governments and/or citizens of some of the member states, particularly those whose economies are performing strongly and where the fiscal position is healthy.
- “The Consequences Of A Breakup In The Eurozone” and related posts (disciplinedinvesting.blogspot.com)
- Germany Recommits to the Euro (online.wsj.com)
- Analysts See No Euro Reprieve (online.wsj.com)
- Official says loan to Ireland to be approved Sunday (ctv.ca)
- Ireland Bailout: European Union Agrees To $89 Billion Loan (huffingtonpost.com)