March 5, 2021

Reluctantly, Europe Inches Closer to a Fiscal Union

The message was clear: join together in a stronger union, or risk collapse.

The story of America’s failed early effort to operate as a loose confederation of 13 states is increasingly relevant for many European officials who are grappling with the drastic problems of their own flawed 17-nation currency union. The lack of strong central coordination of the euro zone’s debt and spending policies is a key reason Europe has been unable to resolve its financial crisis despite more than 18 months of trying.

And that is why, despite all the political obstacles, Europe appears to be inching closer to a more centralized fiscal union that would eventually turn the euro zone into something resembling a United States of Europe.

“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 during 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 conducted behind-the-scenes and many of the ideas have yet to hit official agendas or the public arena. 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 public 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 during a speech Monday, repeating earlier calls for greater fiscal discipline. “I think that European nations will create a confederation and we could then have a confederal finance minister, whose mission would be the surveillance of the entire zone, and who would be able to impose decisions,” on governments in breach of euro zone rules.

Officials, who spoke anonymously because their discussions are politically sensitive, said a major overhaul of the way Europe conducts fiscal policy — coordinating government spending, taxes and deficits — was likely to take a long time and require further 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 of the euro zone.

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.”

The idea of a European Treasury that would enforce fiscal discipline on wayward countries, while also having the power to spread E.U. wealth from healthier countries to ones struggling to pay their debts, is fiercely unpopular among voters in many countries. Those in prosperous nations like Germany do not want to see their taxes used to bail out countries that borrowed their way into trouble. And those in weaker nations are reluctant to allow outsiders to dictate how their governments spend their money and tax their citizens.

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