The Euro: Worth saving.
The Euro: Worth saving.
Eurosceptics are right about one thing, and that is that maintaining a currency union without a central treasury is leaving a crucial control open to abuse. It’s like putting an extra accelerator on the outside of the car, where the driver can’t reach it. If the Euro is worth saving, and I believe it is, then we need to ensure its credibility, and that means stopping member states from being reckless. The easiest way to do that is to bar member states, by law, from borrowing, and instead only having borrowing done at EU level. This will remove a key ability of a reckless member state to thrash the currency.
Now, don’t get me wrong: This is a massive ceding of national sovereignty, and the effective beginning of a United States of Europe. Some countries will not want to do this, and indeed, I suspect that some countries, like Ireland, would be politically unable to do this, and so would have to consider the unthinkable, leaving the Euro. That’s why such a decision would have to be ratified by national referendums. But either way, the Euro’s stability needs stable, well-run countries, and this is the tough love way of getting those countries.
No, of course governments must be able to borrow. My point is that if a eurozone government could not do so without the consent of the rest of the eurozone, by law, it would strengthen the credibility of pledges made to other eurozone countries about controlling spending. The Greeks would not have been able to run up those debts without our consent.
Perhaps I misunderstood you, then. I thought your proposal was not that there be no borrowing at all – a ridiculous idea – but that it would be done through the EU (and thus subject to an extra prudential check).
I don’t think that the Irish people would accept ceding the ability to borrow, and the subsequent matching of tax revenue to expenditure.
Why do you think that it would be a political problem in Ireland ?
Michael, my point is that if a country is unwilling to cede that, it could undermine other eurozone states with good records. Ceding borrowing rights would be the ultimate committment to good fiscal management. It doesn’t mean that a country could not borrow, only that it could only be done with the approval of the other eurozone states. If a country does not want to9 do this, it can leave.
I believe that such a prohibition on borrowing at national level would be effectively impossible from a political and practical point of view. Even the USA allows its 50 states to borrow – just look at California’s troubles.
Why not let events take their course? The cost to Greece of raising new debt would become sufficiently high that it would be forced by the market into massive expenditure cuts, just like California. The standard of living there would fall to what it deserves to be. Just think West Virginia.
I don’t think German taxpayers should permanently subsidise the standard of living of badly-managed Eurozone countries, at least not to any great extent.
If you say to me that expenditure cuts couldn’t happen in Greece because there would be civil unrest and political collapse, then I suggest that it would be better if Greece were not in the Euro zone in the first place.
I don’t think the above is special to Greece, by the way – it applies to any PIGS member. (Is Ireland still a PIGS member?)