About two years ago, at the height of the economic headwinds that were sweeping the U.S., the Standard & Poor's credit rating agency came under heavy fire. The company was accused of being lax in its attitude towards risk assessment. Earlier today, the S&P rating agency issued a warning: it was reviewing a possible downgrade for 15 of the 17 Euro-zone nations. "Snooze and you will loose," is the talk that is being vented in banking circles. Apparently much of Europe has responded in rage. In retrospect, should anyone be surprised?
Merkel and Sarkozy are seeking ways to strengthen fiscal discipline within the EU, through changes in the EU treaty that provide for punitive sanctions against those nations that violate certain expenditure targets. Timothy Geithner is reported to be on a flight to Europe, to lend his assistance to resolving the crisis. It appears as though a strong measure of commitment to resolving the challenge, is being implemented.
The Odd Couple
The initiatives that Merkel and Sarkozy are pursuing are aimed at bringing into line fiscal policy with monetary policy, an incongruousness for which the EU has been long criticized. However, the issues are not just constrained to containing government spending. They also extend to taxation. Ultimately, Germany and France will need to pay for the inefficiencies of lagging nations and PIIGS. And perhaps that is the way it should be, as these stronger nations are the real beneficiaries of the Euro. But let it be said, that the advantage they enjoy is derived from the Euro, and the favorable exchange rate at which they can bring their goods to market. And therein lies the inefficiency. Because really for Germany and France, the Euro should be much stronger. If it were not for the inadequacies of PIIGS it would be. The constrained value of the Euro affords Germany and France a considerable price advantage. Conversely, the weaker nations compete at a significant disadvantage.
Recently, Tony Blair was interviewed by the WSJ regarding the future of the Euro. See "An Encounter With a Diplomat in New York." He made the point that although the political arguments for a united Europe and the Euro are significantly compelling, the economics still need to work. The inefficiency of the Euro, the skewed advantage that it affords some nations at the expense of others, was effectively the point to which he was referring. In its current state, the Euro is fundamentally flawed. That doesn't mean that it cannot be rectified. It can. But it will mean that some significant changes need to occur. The current track which its leaders are pursuing is misdirected, as it does not address the fundamental flaws of the Euro.
Although the attempt by the EU's leaders to bring fiscal policy in line with monetary policy, is a move aimed at addressing a specific weakness of the union, it falls short of addressing a more fundamental issue and fails to deal with the attribution of taxation policies. While it may be conceivably possible and even equitable, for Germany and France to pay for the inadequacies of PIIG, the electorate of those stronger nations will never buy into such an arrangement. Politically, that means that Merkel and Sarkozy are operating under a very short fuse.
No comments:
Post a Comment