Financial Times
August 1, 2011
The latest instalment of the drama that is the eurozone periphery sovereign debt crisis and European Union-wide banking sector crisis demonstrates that fiscal federalism is not going to happen.
Nor will its primitive sibling, an open-ended, uncapped transfer Europe with creditor or donor countries in control of public spending, taxation and privatisation in debtor or beneficiary countries. The core euro area donors would walk out and the periphery financial beneficiaries would refuse the required surrender of national sovereignty.
This leaves two roads for the eurozone.
The first is to disband. The second is to move to a ‘You Break it You Own it’ Europe where insolvency of a sovereign is settled between the taxpayers of that sovereign and its creditors, without any permanent financial support from any other nation’s taxpayers. Likewise, threatening insolvency of systemically important banks (‘sibanks’) and other ‘sifis’ is first visited on these institutions’ unsecured junior and senior creditors. Their claims are written off or converted into equity before any taxpayer money goes in.
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