Trichet’s United States of Europe?

June 3, 2011

By Kathleen Brooks. The opinions expressed are her own.

Another week another round of EU officials proposing solutions to the Greek insolvency problem.

First there was the President of the European Council Jean Claude Juncker who suggested that bond holders could be tempted into rolling over their maturing debt and buying more Greek bonds as long as a few sweeteners like higher coupon or interest rates were thrown in.

But while this will plug short-term financing needs it is still only adding more debt to Greece’s enormous debt pile and not dealing with the core problem:  the financial malaise at the heart of the euro zone that allowed Greece to get away with a flagrant breach of fiscal rules for years.

It came down to Jean-Claude Trichet, whose tenure as President of the European Central Bank (ECB) comes to an end in October, to suggest a long-term solution that would hopefully avoid another debt crisis, but would also require a degree of economic centrality never imagined by the euro zone’s founding fathers.

His idea is for a euro zone-wide Ministry of Finance that would have three critical powers. Firstly, it would be in charge of ensuring adherence to fiscal and competitiveness policies, secondly, it would control the region’s financial sector and thirdly it would centralise representation of the currency bloc in international financial institutions like the International Monetary Fund (IMF). “Would it be too bold?” the Frenchman shrugged as he spoke of his dream at a ceremony in Germany where he picked up the highly coveted Karlspreis.

While Trichet didn’t go as far as to suggest his ministry should control state budgets or issue debt, it is still an extremely interesting idea that – if implemented – could re-invigorate the currency bloc.  Firstly, fiscal integration is often considered the missing piece of the united Europe puzzle. Without actually controlling states’ revenues and expenditure directly, Trichet’s plan would give the EU direct powers to alter the course of national economic policy. For example the central ministry would have if it thought they could jeopardise the financial health of the member.

Trichet’s logic is this: if one nation’s financial mistakes impact other members’ then the EU authorities need to have the power to intervene and stop it from happening. It’s easy to see why the head of the ECB wants to change the rules. Greece’s financial armageddon has led to contagion to other peripheral nations. By far the most concerning is Spain, the euro zone’s fourth largest economy; if it was to go under the ECB along with the EU and IMF would have difficulty plugging its financial holes.

This is the primary reason for developing closer fiscal and economic ties in the aftermath of the sovereign debt crisis. But a centralised Ministry of Finance could solidify Europe’s powers on the world stage at the same time as the “old” world comes up against “new” emerging powers that want their say on the global stage too.

The euro zone is the world’s largest economy. A centralised financial power representing the currency bloc would rival the U.S.’s economic might. It would ensure European financial influence on the global stage, be that at the IMF, the World Bank or the G20.

This would be a powerful force, not least because Germany, the euro zone’s largest economy, seems to have more in common with emerging markets these days then the U.S.. For example, it is a large exporting power, it has no debt problems of its own yet it is a paymaster for a number of indebted nations.

A euro zone Ministry of Finance could be more in tune with the new global financial order than the U.S., where there is likely to be a summer of wrangling up on Capitol Hill over raising the debt ceiling.

So while some may have mocked Trichet’s idea and even compared it to Monty Python’s Ministry of Funny Walks, it might secure the euro zone’s future in more ways than one.

Kathleen Brooks is research director at forex.com.

Image — European Central Bank (ECB) President Jean-Claude Trichet smiles after receiving the Charlemagne Prize 2011 in the western German city of Aachen June 2, 2011. Trichet was awarded with the “Karlspreis” for merits of the extension of the European Union. REUTERS/Ina Fassbender.

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