What does Mrs Merkel mean when she calls for fiscal union?

My reply to this article http://www.ft.com/cms/s/0/a4271df0-2663-11e1-85fb-00144feabdc0.html#comment-1586251 in today’s FT:

Please can the FT go back and ask Frau Merkel what she really means by a fiscal union (or to use the phrase of choice from last week’s agreement – a ‘fiscal stability union’ see para 1 of this http://consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/126658.pdf).

I am pretty certain she means something very different to what most people mean, including officials in the US (which perhaps explains why Tim Geithner thought last week’s summit might come up with a workable solution – which it obviously did not).

When Merkel says fiscal union she in fact means enhanced stability and growth pact – read the summit agreement or read her proposal before the summit http://www.telegraph.co.uk/finance/financialcrisis/8941290/Fostering-fiscal-discipline-Angela-Merkel-and-Nicolas-Sarkozys-letter-to-Herman-Van-Rompuy-in-full.html.

She promises austerity yes, rules yes, punishment yes (as made clear in April by the way http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/120296.pdf ) – but not and never (if I have understood her previous comments correctly) what’s needed for a single currency to function effectively – and that is full fiscal (and political) union.

In other words, the euro needs a single treasury (logically controlled by a single executive, answerable to a single legislature, elected by a single demos), harmonised taxes, and a generous transfer union. As George Osborne rightly observed (like many before him, who were vilified for saying as much), that is ‘the inexorable logic of ever closer union’.

Full fiscal and political union was the dream of the founders of the EU – it is what Mr Delors admits he wanted (and regrets not getting) when he helped launch the single currency. However, Frau Merkel (and I suspect nearly every German) seems dead set against such a move.

No matter how much she might talk about the long game there is no serious attempt being made to sell this vision of unification to the voters in Germany or elsewhere in Europe – because none of the euro leaders appear to really share that ultimate vision either.

So please FT, for the sake of clarity – make sure nothing is being lost in translation – the future of the euro might depend on it.

Kind regards

Huw Sayer


5 thoughts on “What does Mrs Merkel mean when she calls for fiscal union?

  1. Since full fiscal and political union (see comment above) for the full euro17 is obviously off the table, here is my practical suggestion to the EU (always good to have practical suggestions rather than high-faluting theorising).

    Let them:

    Agree that the single currency is not working – it will cause far too much human misery to be worth it – agree that the EU can survive perfectly well without it.

    Agree that throwing countries out is not the answer – too much financial turmoil.

    Agree to split the euro in three – the weakest retain the existing euro – the next tier get Latin Euro 2 – the strongest get Teutonic Euro 3. All with full fiscal union as described below – political union to follow in due course – but the transfer union, harmonised taxes and unified treasury are essential.

    Naturally, our old friend Ireland is welcome to join the Sterling currency union, which seem to be working ok-ish.

    Kind regards

    Huw Sayer


  2. And here’s a suggestion I made before the 9 Dec summit on the FT http://www.ft.com/cms/s/0/d9a299a8-1760-11e1-b00e-00144feabdc0.html#comment-1505126 – along similar lines:

    Glad to see you advocating need for a euro treasury – as I suggested on 18 Nov (on FT and Telegraph):

    “It seems the euro 17 will have to rapidly (over a weekend, behind locked doors) set up a central bond issuing entity fully backed by all 17 states (with first call on all taxes raised in those states).

    Any euro government needing to raise money will have to apply for a loan from this central entity (euro treasury) not the market. The euro treasury will then issue the necessary euro-state bonds and pass on the amount raised (minus a commission) to the regional government.

    The euro treasury will naturally be ‘invited’ (by the euro 17) to take charge of all tax raising (and spending) in all 17 states and be ‘instructed’ to unify the tax regime across the euro area to ensure everyone pays their fair share (but the French will probably ensure the Germans pay a fairer share than everyone else because they can afford it).

    The EFSF provides a good starting point in terms a legal structure for the new euro treasury and bond issuer, complete with euro area finance minister: http://www.efsf.europa.eu/about/index.htm

    I note that Manfred Schepers, CFO at the European Bank for Reconstruction and Development, said something similar: http://www.ft.com/cms/s/0/444f5ee4-15ea-11e1-a691-00144feabdc0.html#axzz1ew0itt00

    “Ever closer Union” – it means what it says on the treaty.


  3. Also suggested here: http://www.ft.com/cms/s/0/44dc1eac-20ed-11e1-8a43-00144feabdc0.html#comment-1543261 this is in a less tongue in cheek manner to my previous reply. Seriously, if they want a real single currency they need to have a real single union – if not they won’t have a single currency at all.

    Better off going for the three or four euro split as mentioned above – more manageable, more flexible, more realistic, less systemic risk, less nationalistic tension (see here for dangers of that http://www.telegraph.co.uk/finance/financialcrisis/8959687/Talk-of-nuclear-default-sums-up-Lefts-anger-at-EU-dictates.html) and less human suffering.


Please leave a comment - it would be great to hear from you.

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s