Europe, it seems, is the problem. Eminent economists argue that the monetary union is doomed. Last year’s fiscal compact, they warn, is crushing Spain’s economy with unwarranted austerity. If François Hollande is elected French president this month, he may even seek to renegotiate the pact.
We prefer to see the compact as a first step on the long road to joint and several liability for eurozone sovereign debt, and the deeper fiscal union that the monetary union always implied. The next step should be a Europe-wide banking recapitalisation scheme.
Consider Spain’s plight. Mariano Rajoy, prime minister, is trying to trim the federal deficit while tackling structural reform, unemployment, a too-decentralised government and a banking sector that has yet to be adequately recapitalised after the end of the biggest real-estate bubble since Japan’s. It is a Sisyphean task. Spain need not be given a Greek-style bailout. But its banks need more help than European Central Bank liquidity can provide. So funds should be given directly to the troubled banks, much as the US did in late 2008. A further step would be to create a proper eurozone-wide deposit insurance scheme. This would end the bleeding of national banking systems in the periphery. What next? There must be rewards for virtue. Greece, Portugal, Ireland, Spain and Italy are struggling to improve competitiveness. But even where things are going quite well – as in Italy – structural reforms are painful, while their benefits may take years to materialise.
Eurozone governments don’t have years. Last week the Dutch government became the 10th to fall since this crisis began. Nicolas Sarkozy may soon be its next victim.
So the eurozone needs to help – and needs more firepower than EU structural funds can provide. This is where eurobonds come in.
Joint and several liability for eurozone sovereign debt can take many forms but what matters is the principle. As Tom Sargent recently argued in his Nobel Prize acceptance lecture, Europe is now where the US was under the 1781 Articles of Confederation. The next step is fiscal federalism, which means giving a federal Treasury some responsibility for the past borrowing of the member states, as happened with the adoption of the 1787 Constitution.
The conventional wisdom is that Germans will not swallow this, not least because they would be on the hook for large-scale transfers to the periphery for years to come. True, Angela Merkel is no Alexander Hamilton. But the German chancellor remains the only eurozone leader who has been electorally boosted by her crisis management. In her likely third term, perhaps in a grand coalition with the pro-Europe Social Democrats, she should have the political capital to realise this federalist vision. Those who doubt her resolve must have missed her last CDU Party Congress keynote address, in which she called Europe a “community of destiny”.German governments cannot avoid a referendum on fiscal integration indefinitely, given the requirements of their own constitution. But with the strong support of German business – riding high on a favourable exchange rate and dynamic economy – a federalist “Ja” campaign can win. More than most, Germans are invested in the European ideal. It has given their country a route back not just to prosperity but also to political respectability, to successful reunification, and now to a dominant economic position. Small wonder no credible German politicians are against “more Europe”.
Europe’s monetary union is neither the joint checking account of a dysfunctional family nor a latter-day gold standard. It was always meant to be a staging post on the road to a federal Europe. Today the biggest threat to its survival is no longer the economic consequences of austerity; it is the political consequences, in the form of populist, anti-European, usually xenophobic fringe parties. Almost everywhere but Germany, such parties are gaining support.
The only way to counter peripheral depression and protect reforming governments is to move towards fiscal union. The time has come to remind disillusioned voters that – to borrow from the Spanish philosopher José Ortega y Gasset – “Europe is the solution”, not the problem.