A “NEW EUROPE” NEEDS A FISCAL UNION, NOT JUST A POLITICAL UNION

Recent commentary out of Europe shows that we are moving in the direction of a more unified Europe. But is it enough? In a speech today, Angela Merkel called for a “New Europe” that will involve closer political ties. Bloomberg reports:

Speaking to her Christian Democratic Union party’s annual congress in the eastern German city of Leipzig today, Merkel said leaders must create a “new Europe” by deepening ties in the 27-nation EU. At the same time, she repeated Germany’s rejection of jointly sold euro bonds.

“The task of our generation now is to complete the economic and currency union in Europe and, step by step, create a political union,” Merkel said. “It’s time for a breakthrough to a new Europe.”

She’s still in denial over what needs to be done here. Creating closer political ties will likely be the first step in regulating budgets going forward. This is just more of Germany hoping they can kick the can and get out of this crisis without having to make any real concessions. But they still don’t seem to understand that this doesn’t fix the issue. Europe needs a rebalancing mechanism within the currency system that resolves the inherent flaw caused by the trade imbalance. Since the Euro is going to survive this crisis (at least if we are to believe Ms. Merkel) then FX rates obviously won’t be that rebalancing mechanism. The only other reasonable option is some form of fiscal union with fiscal transfers. So, greater political union is necessary, but so is greater fiscal union. If Ms. Merkel wants to “complete the currency union” then she needs to accept that greater fiscal unity is the endgame here. If they’re going to make this work then the Euro bond is a simple necessity in this equation. We can continue to deny this, but if Europe is going to let the Euro survive then “New Europe” must also involve new bonds issued by a supranational entity. The longer Germany denies this the longer this crisis will ravage the periphery nations and the global economy.

Cullen Roche

Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.

He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.