Banking Union versus Fiscal Union

In this article, Wolfgang Munchau addresses one of the key debates in the reconstruction of the euro system – whether banking union (with only a limited degree of fiscal union) is sufficient for a viable monetary union.

9 replies on “Banking Union versus Fiscal Union”

There is no real political chance of EZ breakup. What can happen is some will eventually fall out for one or another reason of national sovereignty.

However the current musing by GCB to introduce changes to voting rights in ECB – weighted by GDP share of commitment – might be a blockbuster that brings dowwn the house of EZ going forward.

Fiscal Union will not come just because of the debt contagion and whatnots.
It will only come when CDU/CSU/FDP in Germany, and their allies in Benelux and Austria and Finnland succumb to the political pressure of giving up (more) national sovereignty.

Having given up the printing press for DM, Germans are reluctant to be out voted in ECB by other’s. The psychology of this sovereign predicament – just like current Irish dilemma – will have to play its part out in EU Council.

It seems unlikely that Germany and France, on present evidence, will be capable of providing the leadership required to rescue Europe from the dilemma confronting it. However, a break-up of the euro would have incalculable consequences for the rest of the world which suggests some muscled intervention between now and the G20 meeting cf. view of Donal Donovan.

This comment, in particular, is worth drwaing attention to.

“Increased resources could also help underpin the idea – referred to explicitly by a senior IMF official a few days ago – of the IMF providing some form of precautionary/backup financial facility to a country such as Italy, which could be used, for example, to support intervention in the bond markets. The amount could be some way short of that needed to effect a full bailout, but markets could see this as a sign of confidence.

Market intervention using IM F funds would not, in itself, change lenders’ underlying assessment of the country or countries in question. But here is the key point.

Any involvement by the IMF along these lines would almost certainly involve establishing a ‘‘programme’’ which would require, say, Italy, to implement decisively overdue reforms. And, as in the case of a ‘real’ bailout, failure to meet the agreed targets would have major costs”.

I provided a link to this paper by Winkler back in May.

While there appears to be an emerging expert consensus on the diagnosis of “the euro problem”, this paper is the most complete and persuasive statement of it and is comprehensible even to a layman such as myself. As Europe is not going to turn into a nation state overnight, some half-way house has to be found and it seems it cannot be found without the assistance of the rest of the world.

Neither Merkel or Sarkozy any longer have the necessary political credibility, especially in relation to further institutional change. The Irish media have reacted in the usual Pavlovian fashion; “Oh no, not another referendum campaign!. About as relevant to resolving the immediate crisis as the idea of treaty change itself. The idea does, of course, have major tactical attractions for Merkel. Apart from providing a distraction, it appeals to her home base (“we are ready to do what is necessary but others are not”) and it wrong foots the UK.

Again no mention of the Gold solution.
Gold is only really useful in modern banking to settle foregin imbalances – If we for example were not governed by a banking clique we could have turned all our deposits into goverment money and not suffer a sovergin debt crisis as we would have owed each other our sovergin money and therefore the money supply would be stabilized immediately.
However given the incestuous nature of the european debt markets it would have externalised huge credit losses on outside agents.
This would create foregin policey tensions to say the least – with other countries threatening trade war or even real war for that matter.
Just revaluing Gold to the Euro M1 price would solve much of the Greek & all of the Portuguese debt problems although sadly not ours – however the continental banks would be in a better position to take Irish losses in such a scenario.

An interesting leading artcile from FT Deutschland on the curious sense of timing of Merkel and her unerring capacity to make matters worse (on this occasion through her reported push for immediate recognition of the need for a Greek default a day before the Slovak parliament is to take a decisive decision on the amended EFSF and even before the Troika has reported back from Greece). On this occasion, however, the markets have not reacted in the manner that might have been expected. This suggests that they may, in fact, be paying less attention to what she has to say.


Dork had a great sentence in the last thread which I think is worth “its weight in gold”:

“More importantly though, what the banks did to us was break the moral code that is always attached to money.”

Livonian again

While I am very wary of a fiscal union what I am very certain about is that the majority of “bankers” need to be kept away from any discussion involving any kind of monetary union until such time as they have re-learned their trade.

Many of the current crop of “bankers” are an insult to the profession.

Just as “neo liberals” are wolves in sheeps clothing so are many current leaders of banks.

Perhaps we should introduce a new term : “neo-bankers”. 🙂

But France and Germany do have a HUGE incentive to bond together, and that is likely what they’ll do in this existential crisis. If they fall apart, then the potential consequences mentioned by DOCM are indeed scary. A fragmented europe against a consolidated russia (with nukes) and a disinterested US (busy with China) is a prospect not to be contemplated. The UK should be very scared of this prospect too, but it is putting all of it’s foreign policy chips on the “special relationship” with an increasingly exasperated US.

France and Germany understand the risks iMHO, and if worse comes to worst, they will hold together at the expense of EVERY other country in the EZ zone, and the answer will be “tough titties” at least you have the option to join the Franco/German system at some point in future, for now, lick your wounds and get over it, the choice is not about the small countries it’s about the survival of Europe as an independent entity.

And on Dork’s gold thingy, he’s right but not yet…gold will be the next currency but only at 30k USc per ounce.

I see that Kenny and the guys are getting the message. Last night in Galway he said changes in the European Financial Stability Facility (EFSF)represented a change to the Lisbon Treaty, but this did not require a referendum.

I’m sure that nice Mr Barroso has already given him his lines and threatened Kenny with whatever he needed to threaten him with to ensure we don’t start calling for referendums in Ireland.

We can’t allow little things like democracy and constitutions to get in the way of shoring up the banks. Keep saying we are dealing with a crisis of such proportions that…. hospitals will close…. unemployment up to 30%… ATM’s will shut down… MNC’s will leave en masse… National interest… people with red hair will be shunned in Europe, etc. Frighten the horses.

Anyway, those pesky Irish would only go and vote the wrong way again.

Thats a Cullen Roches quotation and a good informed rant if I ever heard one.
Gold is not a sure thing – I think its rise over the last decade is because of the eurosystem & its attempts to take on the dollar as a world reserve , consequently if the Euro fails Gold could dive & the dollar will destroy all before it.
– Cannes next month may give some offical info into what really is going on.

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