Fixing the flaws in the Eurozone Post author By Richard Tol Post date November 23, 2010 Over a VoxEU, Stanley Black suggests a way of breaking the EMU without breaking the Euro. Categories In EMU, Monetary policy Tags time to think outside the box 5 Comments on Fixing the flaws in the Eurozone ← IMF: Structural Reforms in Ireland → Honohan Gives His Views 5 replies on “Fixing the flaws in the Eurozone” If the Germans persist with their quest for Reparations from the profligate porcines figure 2 presents an elegant solution to this crisis. Ther periphery owes 1.5 trillion of which the core accountd for 1trillion. At the stroke of a pen the problem is solved. The idea seems a good one. The ECB rate for the Irish Central Bnak would be greater than that for the German or French Central Banks. The “delinquent” country central banks would in theory pass this on to its “domestic” banks. There are a numebr of difficulties with the paper. 1. It seems to ascribe the euro structural problem to surplus / defict differentials between the successful economies and the wasters. That is not the full story. 2. The banks have been at the root of the euro problems as well. Without the bank issues for instance Ireland’s problems, difficult as they may have been, were solvable. 3. A solution not considered at all was a “casino” tax on fund movements within the euro area. Why not? Is it not as legitimate as as an interest rate differential to be pocketed by the ECB. 4. The solution proposed is that all countries act like Germany, becoming more competitive. That is fine except that the end result will be that Germany will lose its EU surplus and it wil be rebalanced amongst the erstwhile wasters. It may help solve some problems, but at a cost. 5. How does one prevent big multinational banks from borrowing at a low German rate and transferring funds to Greece for instance which would put is at a competitive advantage to a Greek domestic bank? 6. Overall the paper proposes no structural changes to the abnking system itself which is an out of control monster at the heart of the current crisis. “It may be argued that funds will flow in the interbank market from lower rate regions to equalise the rates.” Without putting restrictions on capital flows in place, this will surely exacerbate the problem as capital will flow to countries with higher inflation?? I think, for a start, we need real regulatory unification. If we had consistent Eurozone-wide regulation, the Irish property bubble, burst and banking meltdown probably would not have happened. For the average tax-payer, regulatory integration would not be too unacceptable, although the banks would resist it. Aside from regulation, fiscal policy will also need to be further harmonised. In this regard, the obsessive focus in the past on limiting fiscal deficits has proved to be wholly insufficient. Fiscal guidelines should focus on surpluses as well as deficits, together with large changes in government revenue and spending. When Irish and Spanish govt revenue soared earlier in the decade, didn’t anyone smell a rat? The basic rules of finances state that if there is excessive growth, then there must be excessive risk. It is not that difficult to come up with acceptable guidelines and regulation that could have prevent all of the current eurozone crisis. BTW, when referring to “regulation” above, I did of course mean financial services regulation. Just heard van Rompuy on the news saying “European fundamentals are sound” Galbraith in 1999, aged 90 “And my last word is – whenever anybody hears it said that the fundamentals are sound, you should have a slight sense of unease”. My sense is to head for the hills. Comments are closed.