Only Way to Save the Eurozone - Further Integration to a Fiscal Union

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Subj: Only way to save the Eurozone- further integration to a fiscal union.

The Eurozone has failed as it was fundamentally flawed in its original design. It was based on a set of principles that have proved unworkable under financial crises. It has only two options ahead: to go forwards towards a closer integration, namely a fiscal union or backwards to at least partial dissolution. The move to fiscal union is the only optimal choice in that Eurozone collapse will not save Europe itself and also will exert a vicious impact all over the world.  Obviously, a single currency in Europe works better than multiple currencies thanks to its various benefits. However, a proper function of this monetary union would need a degree of commitment from every Eurozone member, which has not come yet. The politicians have kept an ambivalent attitude towards integration: they just want to harvest the benefits of a monetary union without any costs to political sovereignty. Investors and banks in EU now have large exposure in the face of Greek sovereign debt and thus are intertwined with each other so deeply. If you look at the Greek crisis the other way around, it actually provides a political impetus for the Eurozone to finally converge into an economic and political union which is the only way the Euro can be fixed.

Henry Farrell and John Quiggin are in support of this view and they pointed out that “Institutionalizing austerity will badly damage European economies in the short term—and the long-term consequences will be even worse.” (Quiggin, 2011). This approach cannot be sustained and inherently unworkable and yet the anti-inflationary European Central Bank has very limited measures to cope with current situation either superficially or essentially. Henry and John had a clear diagnosis of the contradiction here of offering EU countries a viable path to economic stability as well as not to put Germany in a position to always bail out weaker states. They proposed the short term solution of issuance of a common European bond as a way of quantitative easing. This approach is already in place, offering a short term smoothing of the pain but it cannot cure the problem essentially. They further discussed the significance of a rainy-day fund for member states to save in good days and pay down government debts in bad days. They also addressed the need of a stricter system toughening the requirements of the Stability and Growth Pact, in other words creating an active fiscal policy regime.

Henry and John’s view has a focus on the short term smoothing of the pain (Hard Keynesianism) and potentially a case for a European fiscal union, and yet their representation in the journal article is at the conceptual and theoretical level as no specific measures or roadmap has been suggested. Most of the article focuses on the rationale for a fiscal union and touches upon the call for a rainy-day fund (a cyclical adjustment insurance fund in nature) and a conceptual “fiscal policy regime” (Quiggin, 2011). Their elaboration of the rationale for a fiscal union is also limited and there are actually more to complement: the likelihood of future crises will be decreased as a fiscally union allow the ECB policies that are more suitable for larger number of members states; even if the crises occur, there would be less severe prone to systemic spillovers; it will be easier to enact structural reforms to reduce structural divergence between Eurozone countries; it will raise confidence in the viability of the union immediately.  As for the topic of interest- how to save the Euro and the EU, hard Keynesianism is far from enough, considering the effect of the flawed design in the long term. The further move shall be more valorous and substantive: Besides the rainy-day fund for short term transfers to deal with asymmetric shocks, there are other effective measures such a common unemployment insurance fund, a banking union for the Eurozone (the Office of the Comptroller of the Currency counterpart), a Eurozone deposit insurance scheme (FDIC counterpart) and finally a Eurozone central budget. Relative to the rainy-day fund, the unemployment fund, banking union and deposit insurance scheme are actually much easier to implement taking into account of the existing integration of the Eurozone member states, in terms of labor mobility and financial services. These steps can take the lead with creating a rainy-day fund, and ideally in the end a Eurozone central budget could be formed. Admittedly, the major barriers are political hurdles but as long as the member states share the same ideology and have strong willingness to cooperate, the Eurozone could be saved under a more integrated fiscal union.