Toward a More Perfect Union
Now that the euro zone debt crisis has dragged on for more than three years, it’s increasingly apparent that a lack of fiscal unity is at the heart of this protracted and dreary crisis.
Yesterday, it was announced that euro zone finance ministers had taken a first tentative step towards correcting that problem, agreeing to a plan to form a common banking regulator with authority over all of the European Union’s banks.
The first structures should be in place by 2014, although it reportedly took some arm-twisting to get Berlin and Paris to reach accord and safeguards had to be inserted to appease the UK and other non-euro zone countries.
This date is still far down the road and the formation of a new common regulator doesn’t address the fact that one of the biggest causes of this crisis is a monetary union plagued by disparate fiscal policies across the region.
However, this move does create, albeit gradually, a structure by which rescue funding can be routed directly to ailing banks without being subject to endless political wrangling. It also ensures that all of the region’s banks are playing by the same basic rules and it will hopefully prevent the re-emergence of the massive imbalances that led to today’s crisis.
It will also create an incentive to form a more perfect fiscal union. By socializing the risks inherent in any banking system, it will foster a desire to avoid future crises by not allowing dangerous imbalances to take root in the first place.
Europe has been one of the biggest wild cards in my global growth forecast, both over the short- and intermediate-term. Like the rest of the world, I’ve watched the troika of the EU finance ministers, the European Central Bank and the International Monetary Fund agree to a succession of ineffectual “band aids” for Greece, Italy and Spain. So far, they’ve played for time rather than actually fixing the problem.
Now we’ve finally reached the point where agreement will coalesce around much needed structural reforms that will allow real solutions to the debt crisis.
While my outlook for the global economy in 2013 has been tentatively positive, I’m now much more comfortable asserting that it should be a good year for both the economy and global equity markets. To be sure, several unresolved issues—especially the looming fiscal cliff in the US—could send the global economy off the rails again. However, one of the biggest risks is at least in the rearview mirror, even if it is still tailgating us.
Interestingly, events unfolding in Europe since the formation of the EU roughly mirror the early stages of US history.
In the immediate aftermath of the colonies’ Declaration of Independence, the Continental Congress drafted the Articles of Confederation that forged a semblance of a union between the various American states and created a weak national government.
However, the Confederation government struggled to pay its debts because it lacked a real taxing authority. Insufficient funds made it all the more difficult for the fledgling republic to maintain a common and effective defense force. Foreign policy also became a challenge, as a number of states essentially cut side deals with foreign governments.
My main point isn’t that the EU is as deeply a flawed governing model as the Articles of Confederation proved to be. The lesson from this analogy is that the EU lacks key powers necessary for cohesion as a single governmental entity, such as control over fiscal policy, leaving it ill-equipped to deal with the sort of crisis it’s currently facing.
That’s why the formation of a common banking regulator is a first step toward forming a more perfect union among the member EU states. As the American experience in the 18th century has shown, greater integration ultimately leads to greater prosperity, even if it is a bit uneven.
Today’s EU finance ministers can learn much from Alexander Hamilton, a federalist founding father of the US who established a national bank and provided for the federal funding of state debts.
The accelerating transition from a European Union to something more akin to a United States of Europe was inevitable if the grand experiment were to succeed. Success in the region will ultimately get the global economy back on a firm footing, while still achieving the EU’s original goal of ensuring lasting peace on a Continent that has been wracked by centuries of fratricidal warfare.
That’s a win-win for all of us.
Yesterday, it was announced that euro zone finance ministers had taken a first tentative step towards correcting that problem, agreeing to a plan to form a common banking regulator with authority over all of the European Union’s banks.
The first structures should be in place by 2014, although it reportedly took some arm-twisting to get Berlin and Paris to reach accord and safeguards had to be inserted to appease the UK and other non-euro zone countries.
This date is still far down the road and the formation of a new common regulator doesn’t address the fact that one of the biggest causes of this crisis is a monetary union plagued by disparate fiscal policies across the region.
However, this move does create, albeit gradually, a structure by which rescue funding can be routed directly to ailing banks without being subject to endless political wrangling. It also ensures that all of the region’s banks are playing by the same basic rules and it will hopefully prevent the re-emergence of the massive imbalances that led to today’s crisis.
It will also create an incentive to form a more perfect fiscal union. By socializing the risks inherent in any banking system, it will foster a desire to avoid future crises by not allowing dangerous imbalances to take root in the first place.
Europe has been one of the biggest wild cards in my global growth forecast, both over the short- and intermediate-term. Like the rest of the world, I’ve watched the troika of the EU finance ministers, the European Central Bank and the International Monetary Fund agree to a succession of ineffectual “band aids” for Greece, Italy and Spain. So far, they’ve played for time rather than actually fixing the problem.
Now we’ve finally reached the point where agreement will coalesce around much needed structural reforms that will allow real solutions to the debt crisis.
While my outlook for the global economy in 2013 has been tentatively positive, I’m now much more comfortable asserting that it should be a good year for both the economy and global equity markets. To be sure, several unresolved issues—especially the looming fiscal cliff in the US—could send the global economy off the rails again. However, one of the biggest risks is at least in the rearview mirror, even if it is still tailgating us.
Interestingly, events unfolding in Europe since the formation of the EU roughly mirror the early stages of US history.
In the immediate aftermath of the colonies’ Declaration of Independence, the Continental Congress drafted the Articles of Confederation that forged a semblance of a union between the various American states and created a weak national government.
However, the Confederation government struggled to pay its debts because it lacked a real taxing authority. Insufficient funds made it all the more difficult for the fledgling republic to maintain a common and effective defense force. Foreign policy also became a challenge, as a number of states essentially cut side deals with foreign governments.
My main point isn’t that the EU is as deeply a flawed governing model as the Articles of Confederation proved to be. The lesson from this analogy is that the EU lacks key powers necessary for cohesion as a single governmental entity, such as control over fiscal policy, leaving it ill-equipped to deal with the sort of crisis it’s currently facing.
That’s why the formation of a common banking regulator is a first step toward forming a more perfect union among the member EU states. As the American experience in the 18th century has shown, greater integration ultimately leads to greater prosperity, even if it is a bit uneven.
Today’s EU finance ministers can learn much from Alexander Hamilton, a federalist founding father of the US who established a national bank and provided for the federal funding of state debts.
The accelerating transition from a European Union to something more akin to a United States of Europe was inevitable if the grand experiment were to succeed. Success in the region will ultimately get the global economy back on a firm footing, while still achieving the EU’s original goal of ensuring lasting peace on a Continent that has been wracked by centuries of fratricidal warfare.
That’s a win-win for all of us.