A fiscally-unified plan for European defaults

By Felix Salmon
December 20, 2010
George Soros, in a lucid column today, reckons that both might be in the cards:

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There are basically two ways that the European crisis might end up resolving itself. Either the peripheral countries start defaulting, or else the eurozone becomes a fiscal union as well as monetary union. Both are politically unacceptable, of course. And George Soros, in a lucid column today, reckons that both might be in the cards:

The lack of a common treasury is now in the process of being remedied, first by a rescue package for Greece, then by creating a temporary emergency facility, and – the financial authorities being a little bit pregnant – eventually by establishing some permanent institution…

Structural changes may not be sufficient to provide the eurozone countries in need of rescue an escape route from their predicament. Additional measures, such as “haircuts” for holders of sovereign debt, may be needed.

Soros’s solution to the crisis involves recapitalizing the banks, and bringing them under a single European regulator. I like that idea—Europe’s banks have been far too leveraged for far too long, and Europe’s member states will always look forgivingly on their domestic institutions, setting off a regulatory race to the bottom. If a tough regulator can turn the banking systems in countries like Ireland and Spain into something strong and credible, that will help enormously in terms of reducing tail risk in the eurozone. And once that has happened, as Soros says, the banks should even be able to absorb a modest default from Greece or Portugal, and maybe even finance those countries’ recoveries.

When politics meets economics, politics always wins. Eurozone countries will only default when it’s in their political interest to do so; until then, some European institution or other will always be there, in extremis, to bail them out and provide the extra few billions needed to plug whatever budget gaps might be temporarily ineradicable. If you’re going to implement a fiscal union out of necessity that way, you might at least make a virtue of it by imposing a common set of banking standards at the same time.


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It is plain that Europeans are not free people any longer.

It is interesting that George Soros, Mr. Open Society, is quite happy to see the subjugation of people as long as those people are the Germans he understandably hates so much.

Posted by DanHess | Report as abusive

DanHess, in a global economy I’m not sure ANY country is truly free.

They can and will do what they (country by country) believe is in their best interest, however they may ultimately come to the conclusion that they need to integrate farther. Some tough choices either way.

Posted by TFF | Report as abusive

Nice post, but I believe your comment about tough regulators and the Spanish banking system is misdirected. Spain, in fact, has quite good banking regulations, all things considered. During the height of the housing boom, tough Spanish regulators required that the banks increase their capital ratios. The Spanish banking system is about collapse because of the size of the housing bubble, not because of poor regulations. Indeed if you consider that magnitude of the housing collapse as well as the fact that there’s 20% unemployment in Spain, the fact that the banking system hasn’t imploded is testament to the relative soundness of Spanish banking regulations in the first place.

Posted by Kosta0101 | Report as abusive


It is true that no country is free when there are so many debt obligations floating around.

But I do have to disagree with you here:

“They can and will do what they (country by country) believe is in their best interest”

Not really…

In whose interests? Some elites in Brussels? Voters certainly are having no say as their sovereignty is turned over to the EU. Germans aren’t being asked if they want their treasury to become the Greek treasury. No, voters’ wishes are not being respected. Ireland is enduring a Great Depression right now, as “Europe” dictates that 100 cents on the dollar are to be paid on bank debt. Iceland’s elites tried their level best to sign it up for ridiculous debt slavery of 11 times GDP. Luckily, their President recognized that he works for the people and rejected their parliament’s attempts to shoot the citizens in the head. Now Iceland is recovering.

If you think the European project is being carried out in a democratic way, think again. A European Constitution was put forth in 2005 and resoundingly rejected by the French and Dutch voters in elections with very high turnouts. The UK, Ireland, Portugal, Poland and Denmark then canceled their elections.

Instead, the European Constitution was forced on the people (citizens is not the proper word) in a process that avoided such ugly processes as democracy.

“In the June 2007 European summit meeting, Member States agreed to abandon the constitution and to amend the existing treaties, which would remain in force. They also agreed a detailed mandate for a new intergovernmental conference to negotiate a new treaty containing such amendments to the existing treaties (primarily the Treaty of Rome and the Treaty of Maastricht). These negotiations were completed by the end of the year, the new treaty which had previously been referred to as the Reform Treaty become the Lisbon Treaty on its signing in Lisbon on 13 December 2007.”

http://en.wikipedia.org/wiki/Treaty_esta blishing_a_Constitution_for_Europe

Posted by DanHess | Report as abusive

When a soverign defaults there are always tricky questions about who gets what.

Think of our social security trust fund. The only “assets” held in that inpenatrable lock-box are non-transferable treasury bonds. I’m sure that there are similar accounting schemes in the weaker EU states. Will the goverments give their pensioners a haircut?

I think Warren Buffett was wise to move away from the Muni insurance business… voters in countries hopelessly in over their heads will always vote to export pain if that is possible.

I’m with you Felix… the world needs more equity and less debt.

Posted by y2kurtus | Report as abusive