The European Fiscal Framework

Christian Odendahl writes at The Economist’s Free Exchange blog  here.

Bruegel estimates that the kind of fiscal union required to back a European-wide banking system would require a European-level “right to tax” of about 2 percent of GDP.

11 replies on “The European Fiscal Framework”

When I saw them introducing soft hurley’s into kids games I finally realised the place is bollixed.
Enda wants to Wrap the Blue flag around himself and defend “our currency”

Sweet Jesus.

I’m not entirely sure why a unified fiscal authority is required to back a European banking system. A proper central bank with resolution and charging authority (i.e. with the ability to charge Tobin taxes) would surely have the firepower?

Indeed a central bank that was willing to make up the losses, to some degree, to counterparties or simply to let Credit Default Swaps work their ‘magic’ would mean that banks could simply be resolved at no direct cost to taxpayers.

So why do we keep hearing about a requirement for sovereign fiscal backing for banks?

@ hoganmayhew

A good question! You also provide the answer.

Insistence on an unproven point – that a single currency cannot function effectively without a system of federal transfers – informs most of the academic commentary and leads precisely no where. Why it should have such credence in Ireland, a country which lived in an effective monetary union with the UK for decades – with a period of retaliatory measures rather than fiscal transfers – escapes me.

I understand why in the past governments had to be the ultimate backstop – when money was ‘real’, it required ‘real’ taxing power, seignorage just wasn’t large enough to provide a backstop. One of the advantages of a fiat currency, though, must surely be that it is the currency itself that backs it, therefore the Central Bank and not the state.


Insistence on an unproven point – that a single currency cannot function effectively without a system of federal transfers – informs most of the academic commentary and leads precisely no where.

The point you allege that hogan is insisting on is no where in his posting.

However the theory you have constantly promoted, that is that a single currency can function without a proper central bank or bank resolution, has been thoroughly disproven though experiment.

This is weaker than your usual excuse making for the sad sack of logical contradictions and banking interests that is the Eurozone financial system.

There will always be asset bubbles

The issue this time is that for some mad reason, sovereign debt was perceived as all the same and risk free – so banks+other FS put their regulatory capital into it

None of this horse crap about fiscal unions addresses that problem

Philip’s ESBies were well thought out : they or similar are the answer to the ‘what to do with our Regulatory Capital’ problem

Bubble fighting is a different matter, and the notion of some generalised Tobin Tax acting as a saftey net for burst bubbles…is extremely flawed, as it will only encourage more bubbles

This type of fiscal union is the one that hopefully the EU is moving towards. A EU finance ministry, fiscal transfers and a EBIC.
Brugel proposed a strengtened Stabilty pact in 2009, which is happening now.
This should be the first step towards a EU finance ministry.

Any truth in the rumour that the Fed is going to partner with the ECB or EZ central banks in lending to the IMF as a way of getting around problems with the USA not being able to raise its contribution to the IMF? Part of the reason why Tiny Tim is over here this week, to sort out the nuts and bolts?

Slightly off topic.

Larry Elliot in the Guardian considers what the approaches of Hayek and Keynes might be.

Last bit:

“If he were alive today, Keynes would caution against a Hayekian catharsis, but would also be critical of blanket austerity at a time when demand is weak and confidence low.

“Keynes would have approved of the action to slash official interest rates. He would have approved, also, of the attempt to manipulate market interest rates lower using QE. But he would be alarmed at the weakness of private-sector investment, particularly given the large amount of cash sitting idle in company bank accounts. Keynes would conclude that the “animal spirits” of commerce are currently low, and so it is up to governments to prime the pump through higher public spending.

“In the early stages of the crisis, that is what happened. Monetary policy and fiscal policy were supportive and – Keynes would say – the result was the tentative recovery seen in the second half of 2009 and early 2010. Then, however, the financial markets started to look askance at the size of government budget deficits and spooked finance ministries into taking over-hasty remedial action. The result has been that public demand has been sucked out of western economies at a time when private demand is weak. The result has been a slide back towards recession. Keynes would say that instead of worrying about deficits, governments should be worried about unemployment: get growth going again, and the deficit will look after itself.

“Policymakers’ riposte to Keynes would be the same as it would be to Hayek: get real. If we take no action to rein in deficits, we will be slaughtered by the markets; bond yields will go up sharply, negating the impact of cheap money. Keynesian fiscal policy, in other words, will only be possible when the markets share Keynes’s belief that jobs matter more than the level of national debt, and given the way economics has been taught in universities for the past 30 years, that moment may be a long time coming.

“As things stand, economic policy lacks intellectual coherence, monetary policy is governed by a belief in the need for unrestricted credit, and fiscal policy by a belief in “expansionary contraction”. It is a mishmash based on one big assumption; given time, the grown-ups can fix things. There are three possible responses to this: they can fix it given time; they can fix it if they use a different toolkit; they can’t fix it at all because the system is bust. You decide.”

Spain’s services sector contracted in November at the fastest rate since March 2009. I think UK equivalents are also out this morning.

This is bad news for Spain and yet another indicator that Europe is certainly heading back into recession… if it isn’t already there. We cannot rely on any of the current positive growth forecasts out there. I know spin when I see it and it’s coming your way from a budget happening near you today!

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