Europe: is a Centralized Budget in the Works?
Interesting news from the WSJ this morning. They’re reporting that a centralized budget is in the works in Europe:
“BRUSSELS—Euro-zone governments have begun discussions about creating a central budget for the currency union aimed at smoothing over some of the region’s economic divergences, after Germany indicated support for the idea, European officials say.
The discussions are part of a push toward a limited “fiscal union,” after the economic crisis revealed fatal flaws in the setup of the common currency. Those limitations have manifested themselves in the recessions that have engulfed countries such as Greece, Portugal and Ireland after the 2008 financial meltdown, while strong economies such as Germany have recovered much faster.
Until now, much of the fiscal-union debate has focused on the prospects for issuing joint euro-zone debt—so-called euro bonds—but that idea has been blocked by fierce opposition from Berlin and the fact that it would contravene a central element of European Union treaties.”
This is the right direction, but we’re still looking at a lot of work to be done here. I’ve said for years now that fiscal union in the form of something resembling the USA was the right move. And it looks like that’s certainly the path we’re taking here. The good news is that the Euro is definitely not going to be allowed to fail. The bad news is that I don’t think we can expect the deep problems in Europe to be resolved quickly. That means more austerity for now, more economic weakness and more uncertainty. But we’re slowly headed in the right direction…..
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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11 Comments
Cullen,
You are generally a very measured guy, which is one of the reasons I follow you. I tend to get a storyline in my head and need to fight off my centanties. I’m wondering how you can so confidently assert “The good news is that the Euro is definitely not going to be allowed to fail.” From all I read, it seems that while survival in current form is a possibility, Europe has to roll many 12′s in a row for things to work out.
PB
I guess part of it’s a gut feeling, but from what I read and think I just don’t see them letting the whole thing fall apart. And if they let one country out it could cause a domino effect. So they’ll piece it together and make it work. They kind of have no choice. They’re trapped by proximity and there’s only one direction to move economically – towards greater unity….
Their main problem is the pesky depressions that continue to get worse in Greece and Spain. I still expect there’s a significant chance of a breakup occuring via an uprising in these countries.
The people are getting more impatient with their leaders. The leaders are running out of time – their “good intentions” are simply not enough to hold things together…
Well, they aren’t going to “Let” any country out, but what happens when the political order breaks, and a secession party gets a majority in any country. It doesn’t matter which country, either. The EU moves so slowly that it is possible for political conditions to become critical somewhere before the EU acts. Do they simply let that country go, or do they have their “Fort Sumter Moment”, and go to war to preserve the Union? I agree with you that ultimately, the fate of the Euro will be decided in the political arena, and not by markets. It is just that there are 17 political arenas, and it takes only one mistake to blow the whole thing up.
So the EU should go do a yearly budget? They’ll need a year just to come up with the meeting schedule. Mind you, this is a supranational entity that micro manages things like light bulbs and shower heads, while ignoring things affecting all member nations like Energy or Defense policy.
The way it works so far is, nations like Germany give the EU a large chunk of money, the EU returns a good portion of it earmarked for certain things (down to the municipal level), wastes a ton of it on bureaucracy and corruption and hands the rest over to other members, in the same manner (there are net payers and net receivers in this system).
For this to have any credibility, the whole sentiment about the EU and the members towards each other has to change. If asked, the people of the EU member nations have time and time again rejected the power grab from Brussels, so the governments just resorted to not asking the citizens anymore (Lisbon treaty instead of EU constitution).
Just for perspective, the merging of the German pension systems after the unification still costs tens of billions each year in transfer payments, same goes for welfare and associated costs and the competitiveness has not increased as imagined. Imagine that on a level spanning multiple nations and 10 times as many citizens.
The comparison to the USA before it was the USA is very far fetched, because the states didn’t themselves have a federal government or pension and social insurance system of the scope many EU members have right now. The only real precedent I can think of is Germany.
i just don’t see the periphery handing over their sovereignty to the EU (basically germany). look at what’s happening in catalonia. they can’t even decide on giving sovereignty inside their countries. as the depression progresses the willingness of the periphery to more austerity and the willingness of german citizens to more bailouts is diminishing by the minute. it will end with either the periphery out or germany out.
Yeah, maybe we can get Yugoslavia to reunite, too. LOL!
I actually see it a little the other way – the Greeks etc (or at least their puppet leaders) will say anyting and agree to pretty much anything to keep the money flowing, including cede soverignty. Its the Germans etc that won’t!
Remember, in the current limbo state, the Germans have a veto over everything. If they move towards a fiscal union they will be out-voted at every turn – in other words they won’t be ceding sovereignty
I can’t see any good in a centralized budget (as centralized monetary systems). It just means risk concentration is gets higher and higher.
Have you all seen the TV coverage of the riots in Spain? If riots and social unrest spreads to other nations on the periphery, and if that infects the politics of the peripheral nations, then it is going to be awful hard to reach any kind of working consensus on central budgets. The rational desire to save the euro and unite could be overcome by feelings of nationalism and resentment toward the richer EU nations.
the rioters are the rash and unemployed young people with nothing to lose. it’s a dangerous situation like the suicide bombings in Afganistan. but a fiscal union is the only way to solve the EURO long term.