March 4, 2021

Europeans Talk of Sharp Change in Fiscal Affairs

The idea is to create a central financial authority — with powers in areas like taxation, bond issuance and budget approval — that could eventually turn the euro zone into something resembling a United States of Europe.

Officials have been hesitant to publicly endorse such a drastic change. But privately they say the issue has gained urgency in recent months, as it has become clear that Europe’s current approach, which requires unanimity on any significant moves, is unwieldy and inefficient. The idea is being promoted by some global financial officials, who worry about the risks that continued uncertainty in Europe poses to the global economy.

Recently, for instance, when an official from a European central bank met with a financial official in Washington, his host brandished the Articles of Confederation, the 1781 precursor to the United States Constitution, to use as an example of why stronger unions become necessary.

The story of America’s failed early effort to operate as a loose confederation of 13 states is looking increasingly relevant for many European officials. The lack of strong central coordination of the euro zone’s debt and spending policies is a crucial reason Europe has been unable to resolve its financial crisis despite more than 18 months of effort.

The lack of progress has contributed to steep declines in European stocks recently, sending tremors through markets in the United States as well. On Monday alone, several major European markets fell more than 4 percent while markets were also down on Tuesday morning in Australia and Japan.

And that is why, despite all the political obstacles, Europe appears to be inching closer to a more centralized approach, and some officials are going public on the issue.

“If today’s policy makers want to successfully stay the course, they will have to press ahead with structural changes and deeper economic integration,” António Borges, director of the International Monetary Fund’s European unit, said in a recent speech. “To put the crisis behind us, we need more Europe, not less. And we need it now.”

Nothing happens quickly in Europe, however. For the most part, such efforts are still being made behind the scenes. But several longtime financial and central bank officials and staff members said there had been a substantial step-up in planning for a closer European fiscal relationship to match the unified monetary union under which the euro zone has operated for more than a decade.

For now, officials are mainly talking in generalities.

“The crisis has clearly revealed the need for strong economic governance in a zone with a single currency,” Jean-Claude Trichet, the departing president of the European Central Bank, said in a speech Monday, repeating earlier calls for greater fiscal discipline.

Officials, who spoke anonymously because their discussions were politically charged, said a major overhaul of the way Europe conducts fiscal policy was likely to take a long time and require changes in the treaties governing the euro. But they pointed to the smaller changes that were already taking place as evidence that euro area financial ministries see that they have little choice but to move together if they want to avoid a catastrophic breakdown.

With the new bailout for Greece that was agreed upon by European leaders in July still awaiting approval from each country in the euro zone, the fractionalized way that Europe runs fiscal decision-making risks setting off yet another crisis at each step along the way. Every plan requires agreement among finance ministers and the Parliament of any member country can veto the deal.

Many economists say that the Continent’s debt crisis, which began in early 2010 with the threat that Greece might have to default on its loans, could have been resolved far more quickly if there were some sort of central financial body, akin to the Treasury Department in the United States.

“If they had the equivalent of the U.S. Treasury, then this treasury could have formulated proposals with the collective objective in mind, rather than 17 national objectives competing with each other,” said Garry J. Schinasi, a former official with the International Monetary Fund who now privately advises European central banks and governments. “Instead, they fumbled around and took two baby steps forward and three backward.”

Louise Story reported from New York and Matthew Saltmarsh from London.

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