Stability or sovereignty?
-Jane Foley is research director at Forex.com. The opinions expressed are her own.-
It is generally agreed that if EU officials are to reinforce their commitment to the euro then the Eurozone’s fiscal Stability Pact will have to be strengthened.
The Greek crisis clearly illustrates why the maintenance of fiscal prudence is a prerequisite to a smooth running monetary union.
EU officials are no doubt currently chewing over a number of proposals as to how the Stability Pact may be tightened.
This, however, is another case of locking the stable door long after the horse has bolted. To make up for the lack of budgetary prudence exercised by some EMU members in recent years, others are now being required to guarantee their debt. This may work in a federal system but in Europe it is running up against that critical issue of sovereignty.
Germany is faced with having to contribute a whopping EUR123 bln to the EU/IMF EUR750 bln European Monetary Fund. German tabloids have not held back from venting their dismay.
The results of the May 9 regional election in North Rhine Westphalia also captured the doubts of many Germans towards what has been termed by the press as a ‘transfer fund’.
Granted the Greek PM is still promising to pay back the loans; but clearly scepticism on this point is widespread. Many Germans blame their government’s announcement that previously promised tax cuts will not be forthcoming with the fact that money will now be sent to help Greece.
The lack of desire in Germany to bail out Greece sums up the fact that the Eurozone is very much a cluster of sovereign states. The Monetary Union that was accepted by Eurozone member countries brought promises of monetary stability but breathed nothing about fiscal union.
Eleven years into EMU most Eurozone members still have no wish to give up their autonomy over fiscal policy and step closer to federalism. This factor may mean that the EU will eventually have to recognise that the Greece will have to be allowed to default on its debt and potentially be allowed to exit EMU for the greater good of the system.
This would means heavy losses for some investors but it would remove a lot of uncertainty from the market. For the first time this week an EU official hinted that a process for debt restructuring should be built into the EMU framework; Chancellor Merkel suggested that “orderly insolvencies of states will have to be studied”.
She also indicated that Germany would not be prepared to keep on funding less prudent EU nations. The sharp fall in this month release of Germany’s ZEW survey (to 45.8 in May from 53.0 in April) is a reminder that the uncertainties surrounding the fiscal crisis is having a detrimental impact on investor confidence.
If the doubts as to the future stability of the Eurozone continue they will almost inevitably have a detrimental impact on growth of the economy of the Eurozone and possibly beyond.
This supports the view that EU ministers should act quickly to restructure Greek debt. For now selling pressure on the euro can still be considered relatively orderly. What could force the EU to take action would be an increase of disorderly conduct in the movements of the euro.