Do Eurozone leaders finally ‘get it’? Not quite yet

by Charles Wyplosz

Vox
December 5, 2011

This week’s announcements by German Chancellor Angela Merkel and ECB President Mario Draghi that the Eurozone is taking steps towards a closer fiscal union seem to be calming markets and restoring confidence in the decision-making of Eurozone leaders. This column argues, however, that the devil is still in the detail.

We seem to be watching a delicate ballet. All of the sudden, Angela Merkel envisions fiscal discipline and ECB action. A few hours later, Mario Draghi talks about sequencing - first fiscal discipline, then ECB action. For those of us who have been arguing for months that we need both together, this is music to our ears. But for all of us who have seen so often vague statements concealing an inability to understand what financial crises are, it is a bit early to cheer up (Véron 2011, Wyplosz 2011b).

Fiscal discipline

Angela Merkel’s vision of fiscal discipline combines the authority to tell undisciplined countries what to do and long periods of austerity in order to inject them with Germany’s cherished “culture of stability”. This will not work.

Enforcing fiscal discipline is indeed essential, both in the long run for the euro’s survival and in the short run for markets to start relaxing. But the problem is that the proposed model is one of centralised enforcement. The Stability and Growth Pact has been a tragic failure, in part because it sought to apply top-down pressure on sovereign governments. Merkel is clinging to this approach, which is the German federal model, but even in Germany this model is not working too well (some lenders went bankrupt and had to be bailed out, and this may happen again). Moreover, the German chancellor wants significant transfers of sovereignty, which have dubious democratic appeal. Neither the Commission, which is volunteering for the job, nor the European Court of Justice, whose competence in judging excessive deficits is questionable, are obvious recipients of such fiscal authority.

This is why many countries will block the proposed Treaty revisions. The alternative of circumventing opposition by pushing through bilateral agreements among the willing, apparently under consideration, is bound to be extraordinarily divisive.

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