Eurobonds and fiscal union: The only way to resolve the Euro crisis

By | September 21, 2011

Jean-Marc-Trouille,-BradforJean-Marc Trouille is the Jean Monnet Chair in European Economic Integration and Director of Master’s in European and International Business Management at Bradford University School of Management. His research interests include Franco-German economic and industrial co-operation in the EU, single market integration,  industrial policy in the EU, and business cultures and intercultural management in Franco-German companies.


1. “Life support” for the Euro

Throughout this summer, the Eurozone has been navigating in stormy waters, with only remote hope that the volatility of financial markets might calm down in the Autumn. According to ECB President Jean-Claude Trichet, the European debt crisis held the potential for the worst market collapse for almost a century. Increasingly, economic observers speculate on the Eurozone’s survival and question whether European integration itself would survive a collapse of the Euro.

Is the European currency ‘under life-support’, as some euro-sceptics argue, not without Schadenfreude {malicious enjoyment of someone else’s misfortune} – and forgetting the actual state of their own home economy and the collateral damage that a collapse of the Euro would cause far beyond Eurozone boundaries? Is it just ‘an idea that cannot work’? What is needed to make it work?

2. European Union is both monetary and economic


Over the last 12 years, monetary union has been an undeniable success. However, several Eurozone members have overlooked the fact that the Economic and Monetary Union (EMU) was not only designed as a monetary union, but also as an economic one. Lack of economic and fiscal convergence, hence insufficient progress towards an optimum currency area (Mundell) along with an absence of political union to back up the whole project, means that the Euro area has not been able to achieve more homogeneity and is not sustainable in its current form.

These systemic weaknesses inherent to EMU foundations have now been uncovered by the difficulties in the financial sector – even though these were generated outside Europe, and worsened more recently due to increasing concern about sovereign debts. Fiscal rules were too weak to prevent some Eurozone members from running unsustainable deficits that sparked several crises.

3. Europe’s fractured North-South divide

As a result, the Eurozone increasingly appears to be fractured between a ‘northern’ group (consisting of Germany, the Benelux countries, Austria, Estonia, Finland, Slovakia and Slovenia), and a ‘southern’ group (comprising Greece, Ireland, Portugal, Spain and Italy). France finds itself on the edge of this North-South divide but bends dangerously towards the southern group. The northern group has a strong industrial specialisation, controls its production costs, has a trade surplus and balanced public finances and fairly high potential growth. The South provides non-exportable services, has uncompetitive production costs, suffers from macroeconomic imbalance, and faces increasing hurdles in servicing its debt.

4. The only solution for Europe

Will this widening North-South divide between fiscally prudent, triple-A rated countries in the North, and increasingly struggling debtor nations in the South, lead to an implosion of the Eurozone? Consequences would potentially be disastrous, both for global economic growth (the EU has the largest GDP and is the main trading area in the world), and for the European project as a whole.

Most economists and policy advisers agree on what needs doing: Europe can only resolve this crisis by means of creating Eurobonds and implementing a fiscal union, that is, by mutualising national debts. The ECB can continue to expand sovereign bond purchases (and, de facto, make of its liabilities a hidden Eurobond) and it can also cut interest rates. But this will only save time whilst political leaders are postponing the inevitable Europeanisation of sovereign debts. More than an economic choice, the dilemma they are facing is a political choice.

2 thoughts on “Eurobonds and fiscal union: The only way to resolve the Euro crisis

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  2. Mehran

    agree.The EZ needs further intigrateon to work (well that is what they think anyway, I donot see it working myself to be honest).So forming a block.On the other hand normal countries like Danemark, Sweden, the UK will not touch the Euro with a pole and rightly so. The only ones that will join are the eastern part who see it as a safeguard against Russia and a new source of free money (let say it as it is). Basically countries the EZ would be better off without simply even more unstable than the South in most cases.Leaving the nett contributors with no other choice than avoiding anymore intigrateon as they could easily be outvoted (see eg bankbonus).Effectively splitting the EU at least in 2 parts.And requiring a treatychange that will see not only the UK and Co but also several Northern countries wanting powers back (while at the same time transferring other powers to brussels to come to some sort of working Euro arrangement.Well if it doesnot fall apart beforehand. One voter-ignited exit might kill the whole thing. And we probaly have a decade or so in 17 countries for that. Well probably not in all 17 but in say 8 or 9 important ones. Stats say order a coffin.

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