The cost of Frau Merkel

There are basically two ways to resolve the Euro conundrum. One is the provision of Eurobonds, jointly provided by all the Eurozone members, to underwrite the debts of those Euro countries that get into big trouble through lack of competitiveness or for any other reason. The problem with this is that the Germans, now in a dominant enough position as the paymasters of the EU to be able to dictate terms (70 years after the war) to the rest of Europe, refuse flatly to consider it, on the reasonable enough grounds that they would be the biggest funders of what they see as the profligate and indisciplined periphery. A variant of this idea is that the ECB become the lender of last resort, but if that power were used extensively (as the most indebted countries would demand) rather than sparingly, it would be open to the same objections as Eurobonds. The only other serious option, which the Germans favour, is fiscal union. But there are major drawbacks to that too, and big concerns as to whether it is practicable.
Fiscal union would still allow each member state of the Eurozone to make its own budget, its own balance between what it raises in taxes and how it spends it, but it would have to gain the approval of Brussels. Draft budgets of all 27 EU countries would be forwarded from Brussels to the finance ministries to each of the other member states, all the objections would be collected by Brussels officials and then forwarded back to each member state. Countries that ignored objections could be required to attend the EU Council of Ministers where QMV would override a country’s tax & spend plans and necessitate a new budget to be put together to comply with the Brussels mandate.

There will be huge objections to this tight German proposal. It will involve a massive loss of sovereignty. That will be political hemlock for Cameron, and watching him drink it, since he says he is not opposed to the Merkel plan, in front of his rabid right-wingers should be entertaining. But no doubt it will also be poison for many other member states as the details sink in that they would no longer control their own national budget.

Then there’s the question whether it would actually work. It is worth remembering that when the EU Growth and Stability Pact was set up precisely for this same purpose of preventing member states overstepping a deficit ceiling of 3% of GDP, it fell into desuetude when its two biggest supporters, Germany and France, both overstepped the mark – and simply ignored it with impunity. But even that is not the really big issue. That is, how can a peripheral state with a weak economy, which has already within the Eurozone lost control of its exchange rate and interest rate, then survive if (as is very likely) it falls into recession and high unemployment but then cannot control its own budget either to deal with its problems?