Next week, leaders of the euro area countries will gather in Brussels in an effort to take a bigger step toward ending the region’s sovereign debt crisis. They hope that by agreeing to tougher penalties for countries that break the euro area’s budget rules, they can entice the European Central Bank to do more to stem the crisis.
But the question is whether the eurozone countries are willing to give up control of their budgets.
There are already rules that govern the fiscal policies of the countries that use the euro currency, like a rule requiring budget deficits of no more than 3 percent of a country’s gross domestic product. But the rules have been broken with impunity. To build credibility with the ECB, the stronger euro economies like Germany and the Netherlands have been pushing new enforcement rules, and over the past few weeks France has reluctantly agreed to come along.
Jacob Kirkegaard of the Peterson Institute for International Economics says the rules would ask for an unprecedented handover of fiscal sovereignty from the euro countries.
“The members of the euro area going forward are going to submit themselves to constraints on their fiscal policies that are … usually, in my opinion, historically only associated with reparations after wars,” he says.
Among the enforcement mechanisms being proposed is sending violators to the European Court of Justice for sanction. Another proposal: Countries would have to submit their national budgets to the European Commission for scrutiny, and possibly line item vetoes, before submitting them to their own national parliaments. Under a third proposal, violators would be subject to strict austerity programs.
Ken Rogoff, a Harvard professor and former chief economist for the International Monetary Fund, says he doesn’t put much credence in the fiscal rules being discussed.
“I don’t think they’re credible,” he says. “The idea that the commission will have line item veto, approve each expenditure, each country’s budget — this doesn’t have the ring of common sense.”
Convincing The Central Bank To Help
Rogoff believes the leaders are really looking for a political fig leaf that will allow the ECB to get more involved in fighting the debt crisis. “An agreement like that might be enough for the ECB to pretend that it’s real and go in and provide a temporary solution to the problem,” he says.
For instance, the central bank could buy up more of the bonds of struggling nations like Greece, Spain and Italy to keep their governments solvent. But what really needs to happen, Rogoff says, is a deeper political and fiscal union among eurozone members, which will take time.
Kirkegaard predicts the leaders will lay the foundation for that deeper union at their Dec. 9 meeting. But because changing the EU’s founding treaty is a lengthy process, he and others have suggested that the eurozone countries might embark on a side agreement that binds them to new enforcement rules more quickly. He says it will be hard for any country to say no to such a deal because of this implicit threat.
“If you don’t sign up now to these tougher fiscal rules, well, don’t expect the European Central Bank to provide you any help,” he says.
Kirkegaard thinks that will be enough of a threat to get all 17 euro area members to agree to the new rules, and that all of them will eventually weather this crisis and the euro area will be preserved. Rogoff is far more skeptical.
“I feel confident that there will be a euro at the end of this, but I feel equally confident that you won’t have all the existing countries in it,” he says.
Rogoff thinks a few of the countries, like Greece and Portugal, will end up on sabbatical from the euro, possibly for decades until their economies are mature enough to return. The big question mark is Italy: If it falls out of the euro, he says, it puts the whole grand experiment in jeopardy.