Towards a Euro Fiscal Union: Reinforced Fiscal and Macroeconomic Coordination and Surveillance is Not Enough

Taking a closer look at the EU’s approach to enhanced surveillance, one finds that the approach of coordinated surveillance of autonomous fiscal policies of Euro member states is unlikely to deliver meaningful results. The widespread public perception that there is a general debt crisis in the euro area was inadequate before the 21st July 2011; it was only on that date that an EU summit in Brussels brought the doubtful decision on a 21% haircut on private creditors of Greece – a decision aimed at helping Greece, but as capital markets translated this as a model of how governments of the euro area would try to solve potential debt problems of other countries, e.g. Spain and Italy, the refinancing of these two countries was seriously undermined and interest rates for those countries sharply increased. The net welfare loss of the July 21 decision is close to € 400 billion, a historical pitfall. The popular argument that the debt crisis in the Euro zone reflects decades of ill-designed fiscal policy is not convincing since the massive increase of the euro area debt-GDP ratio occurred only in 2007-2011 and thereafter contagion and policy pitfalls destabilized the euro area; however, as regards Greece the country stands for a doubtful policy record. The trigger for the crisis was political fraud in Greece where the government in 2009 adopted a budget, which would bring a deficit-GDP ratio of about 4% - as notified to the Commission - but in reality was 15%. Such a deficit implies that the debt-GDP ratio will increase within 5 years by at least 45% and it is clear that 2009 saw the irresponsible (and failed) attempt of the Greek government to get re-election on the back of a very sharp violation of the Stability and Growth Pact. The European Commission has not admonished Greece publicly for this breach of the Pact. It has also failed to bring Ireland before the European Court, despite the fact that Ireland’s government ignored for many years the most basic requirements of EU directives dealing with prudential supervision. The Irish government has achieved a Guinness Book record for the deficit-GDP ratio, namely 32% in 2010, but this extreme deficit – largely reflecting on-off costs for nationalization of banks – also caused a mute response from Brussels.