From a European Union perspective, it’s somewhat surprising that the extraordinary financial crisis we’ve been living through has not generated more pressure for another big push at EU integration – if not in the political sphere, then at least in the economic one. According to conventional EU wisdom, it usually takes a crisis to make Europeans understand why closer integration is a good thing. But on this occasion, it’s not happening – or at least, not yet.
For the perfect explanation as to why this should be so, I recommend an article by Otmar Issing, the European Central Bank’s former chief economist, in the latest issue of the journal Europe’s World. Issing’s article discusses the merits of issuing common bonds for the 16-nation eurozone – an initiative that would, in theory, mark a major step forward in European integration – and comes down firmly against the proposal.
Why? The idea appeals to Dominique Strauss-Kahn, managing director of the International Monetary Fund, Joaquín Almunia, the EU’s monetary affairs commissioner, Giulio Tremonti, Italy’s finance minister, and many others. Supporters of a common eurozone bond contend, in essence, that there is strength in numbers and (a more slippery point) that European solidarity is a noble cause.
They say financial markets would show respect for bonds collectively guaranteed by Germany, France and 14 other countries. A common bond would put paid to the “unfair” practice by which markets have forced countries such as Greece, Ireland, Italy and Portugal to pay substantially higher interest rates on their government bonds, relative to Germany, during the financial crisis. Europe would stand as one.
Here is Issing’s stony response: “A common eurozone bond would certainly imply that countries like France and Germany would have to pay higher interest rates, and that would in the end mean higher tax burdens for their citizens… Issuing a common bond would be a first step on the slippery road to ‘bail-outs’, and thus the end of the euro area as a zone of stability.”
With an eye on Greece, Ireland and Italy, he continues: “The immediate trigger and the root cause of rising spreads were financial markets’ growing concerns about the solidity of some eurozone countries. This loss of credibility has been a consequence of dramatic deteriorations in their current and expected fiscal positions. But a common bond is no cure for a lack of fiscal discipline; on the contrary, it would tend to encourage countries to continue on their wrong fiscal course.”
In other words, Greeks and Italians in particular should get their houses in order (the Irish are already trying). German taxpayers have no obligation to shell out for any country that isn’t hard at work consolidating its public finances. So says Issing, and Germany’s coalition government shares his views – while admitting sotto voce that if a weak eurozone country fell into truly serious difficulties, Germany would have no choice but to come to the rescue.
Issing’s argument is undeniably powerful. But I ask myself one question. The public debts of Greece and Italy are set to shoot up over the next few years. There doesn’t seem much evidence of an effort in either country to tackle the problem with the determination that Issing regards as necessary. The longer it’s put off, the harder the task will be. Just how are they to be persuaded to do it?
Across the globe: Gideon Rachman and his FT colleagues debate international affairs on