European leaders raced yesterday to save the euro from impending collapse, as momentum gained for a radical proposal in which countries that use the common currency would cede control of a big chunk of their budgets to a central authority.
In the run-up to the next European summit on December 9, hopes were rising that, with their backs to the wall, leaders will finally come up with a solution that will once and for all bring an end to a crisis that has threatened to wreck the global economy.
A raft of hitherto taboo ideas gained sudden prominence. Chief among them: a fast-track move to a fiscal union between the 17 countries that share the euro—a proposal some say would be a big leap toward a United States of Europe. Such a move could greatly enhance European stability, but at a cost, critics say, of national sovereignty and democratic accountability.
Another plan gaining support in the face of fierce German resistance is for the eurozone’s six triple A rated nations to pool their resources through a joint bond to prop up some of the single currency bloc’s most indebted members. Germany, the EU’s richest member, rejects the idea because it fears it would be tapped for the lion’s share of the bailout.
A critical test comes today when European finance ministers meet for a summit in Brussels and Italy tries to tap markets for billions more in cash. US President Barack Obama was meeting top EU officials yesterday at the White House to discuss the crisis.
Whatever materialises, the euro is in grave danger—with experts saying the currency could fall apart within days without drastic action. Evolution Securities economist Gary Jenkins said a series of government bond auctions this week “may determine the future of the EU.”
Financial Times columnist Wolfgang Munchau wrote Monday that the common currency “has 10 days at most” to avoid collapse and big decisions need to be taken, including moves to a fiscal union and the creation of a common treasury with wide-ranging powers.
As experts predicted the endgame for the euro, Europe buzzed with talk of a central treasury authority for the eurozone — an idea that just a week ago would have seemed impossible.
Unlike the United States, which has centralised institutions in Washington DC for raising taxes and spending, the eurozone has 17 independent treasuries with little oversight from Brussels. That would change under the fiscal union proposal being aired ahead of the EU leaders’ summit in less than two weeks.
While not explicitly backing such a move, Germany and France, the eurozone’s two biggest economies, have promised to propose new measures that will make the 17 operate under strict and enforceable rules—the hope being that no country, however small, can wreak such damage again.
The idea of fiscal union is controversial not least because it raises fears among some members that economic policy around Europe will be run by the EU’s biggest player: Berlin.
But with Europe on the brink, it may be a price that many nations are willing to accept. The break-up of the euro, established only in 1999, could have catastrophic effects around the global economy. Among the unappetizing prospects are a massive bank run, the seizing-up of the global financial system, and chaotic currency fluctuations for those that go back to their historic money.
“Everyone knows that if the eurozone crashes the consequences would be very dramatic and in the race after that there would no winners, just losers,” said Finland’s finance minister Jutta Urpilainen.
Already, the Paris-based OECD is warning that the global economy is in for a hugely rocky road over the coming months ahead. In its half-yearly report Monday, it said the continued failure by EU leaders to stem the debt crisis that has spread from Greece to much-bigger Italy “could massively escalate economic disruption” and end in “highly devastating outcomes.”
The latest bout of turmoil to afflict the eurozone came last week after Germany failed to raise all the money it wanted in a bond auction and Italy had to pay through the roof to get investors to part with their cash.
If a busy bond schedule this week meets—Italy is planning to raise €8 billion today—with an equally poor reception, then the euro’s countries will be in real danger of being locked out of international markets and facing the devastating prospect of defaulting on their debts.
Germany, as Europe’s only powerhouse economy, would then have to decide whether to bail its partners out—or bail out itself. As governments nervously tap bond markets, Germany appeared to be readying to ask its eurozone partners to back measures for deeper fiscal union. “The common currency has the problem that the monetary policy is joint, but the fiscal policy is not,” Germany’s Finance Minister Wolfgang Schaeuble said in a meeting with foreign reporters in Berlin. “Consequently, we are working now to expand the common currency through a common stability policy.”
Schaeuble said the proposal, which Chancellor Angela Merkel is to bring up during the December 9 EU summit, would only require passage by the 17 eurozone member states, although the other ten EU countries, such as Poland and Sweden, would be welcome to adopt it if they wanted.
The prospect of a deeper fiscal union has been greeted positively in the markets, with the Stoxx 50 index of leading European shares closing up 3.6 per cent and the euro rising 0.4 per cent to US$1.3337.
“There appears to be a sense of greater urgency among eurozone leaders after some very worrisome developments last week,” said Vassili Serebriakov, an analyst at Wells Fargo Bank. However, analysts said such a move would take a long time to come to fruition. (AP)
