PROPOSALS FOR strengthening eurozone co-operation which emerged from Tuesday’s Franco-German summit are just that – proposals. There’s many a slip between cup and lip. On a slow news day they may also have been given a sense of greater significance than perhaps deserved.
These are largely a rehashing and repackaging of long-standing national positions, more notable for the dogs that didn’t bark – eurobonds and possible increases in the European Financial Stability Facility – than for their novelty.
Promising to stand by the euro – three cheers! – Chancellor Merkel and President Sarkozy long-fingered the idea of creating a collective borrowing instrument in the form of eurobonds. Not out of the question, they said, but insisted disappointingly that such a move must follow a substantial expansion of fiscal co-ordination and discipline. That the two issues are intrinsically linked is indisputable, but a closer fiscal union will not in itself reassure markets, while selling closer EU integration to a sceptical public will require a strong rationale rooted in economic necessity. The eurozone should move on both fronts simultaneously.
Replacing all national sovereign bonds with eurobonds would create a market worth some €5,500 billion whose viability would be critically dependent on the credibility of eurozone collective fiscal discipline. Such a market, which would allow all to borrow at rates close to Germany’s, would have the weight, like dollar- or yen-denominated debt, to see off the sort of speculative raids that have hobbled some of the eurozone’s smaller economies. And closer fiscal union would go a long way to removing the danger of “moral hazard”.
The proposed strengthening of eurozone governance in the form of biannual leaders’ meetings under European Council president Herman van Rompuy is a significant, welcome reversal by Germany of its longstanding position on governance and a logical step in the direction of replacing and strengthening the current Stability and Growth Pact mechanisms. But small member states like Ireland will want assurances that it is not intended to move away from use of community decision-making methods towards intergovernmentalism. Ambiguities about the central role of the European Commission in the process, specifically its sole right of initiative, will have to be removed or the new council would inevitably tend to become a vehicle of the big states.
A tax on financial transactions is a worthwhile new means of raising revenue for the EU or national treasuries, but Minister for Finance Michael Noonan is right to insist that, because of the highly mobile nature of finance capital, it would have to be EU-wide. That makes the prospect of agreement unlikely.
This autumn, the Government will introduce legislation to set a limit to State borrowing, a condition of the EU-IMF bailout. But the idea such a provision should be put in the Constitution is both politically impracticable, given the referendum requirement, and economically inadvisable in tying the hands of governments that may need to take countercyclical measures in a recession.