Sunday, May 16, 2010

Fiscal Union within the Euro Area

"I do not want to comment on a particular measure by a particular country, but I do want to suggest that within the Euro Area it’s become very clear that there is a need for a fiscal union to make the Monetary Union work." Mervyn King, Governor of the Bank of England, 2010, May 12.

"Mervyn King, Governor of the Bank of England, fears that America shares many of the same fiscal problems currently haunting Europe. He also believes that European Union must become a federalised fiscal union (in other words with central power to tax and spend) if it is to survive. Just two of the nuggets from one of the most extraordinary press conferences I have been to at the Bank.

"It was as if King had suddenly been unleashed. Bear in mind King is usually one of the most guarded policymakers in both British and central banking circles. Not yesterday.

It isn’t often one has the opportunity to get such a blunt and straightforward insight into the thoughts of one of the world’s leading economic players. Most of this stuff usually stays behind closed doors, so it’s worth taking note of. And I suspect that while George Osborne will have been happy to hear his endorsement of the new Government’s policies, Barack Obama and the European leaders will have been far less pleased with his frank comments on their predicament...." Link

"It's not just the UK deficit that so concerns Mr King. He also worries about Europe, where as with the UK fiscal policy the Governor has found his tongue as never before. The emergency measures, he said, provided but a brief window of opportunity for distress nations to put their houses in order. There would also need to be fiscal union within the euro area to make the monetary union work.

As it happens, that's precisely what the emergency measures seem to amount to. It is impossible to see them as anything other than a giant leap towards shared fiscal responsibility in the eurozone. As if to hammer home the point, the European Commission yesterday announced plans to vet national plans for consolidation before even national parliaments get to hear about them. The centre is progressively imposing its will. It is also what the euro's founding fathers always knew would happen. A cynic might say it was even planned that way by Europe's political elite.

They knew you couldn't have monetary without full scale fiscal and economic union, but the project was sold to citizens on the basis that you could. They also knew there would eventually be a crisis that would push Europe, whether voters liked it or not, towards the necessary fiscal union." Link

European Central Bank President Jean-Claude Trichet: "We are facing the most difficult situation since the Second World War -- perhaps even since the First World War.'"A 'Quantum Leap' in Governance of the Euro Zone Is Needed" Link

stay tuned!


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