Eurozone needs ‘fiscal and political union’

The eurozone cannot survive as a viable economic region in the longer term unless there are moves towards fiscal and political union, according to chief economic commentator with the Financial Times Martin Wolf.

As it stands, the main response to the crisis among eurozone member states is increased surveillance of fiscal policy and a commitment to maintain balanced budgets, through the new semester programme.

However, Mr Wolf, who was speaking at an event in the Institute of International and European Affairs (IIEA) in Dublin, claimed that, “a disciplined union is unworkable in the long term. It is politically unfeasible.”

He argued that the project still lacks political legitimacy and accountability. Over time electorates will get increasingly frustrated with unelected Commission officials dictating economic and fiscal policy without proper democratic structures.

Consequently, there has to be moves towards fiscal and political union to complement monetary union, said Mr Wolf. At the very least this requires some sort of fiscal transfer mechanism that can facilitate the adjustment of income and spending across member states.

The ECB will have to play a much more active role in stoking economic development and there has to be a much more comprehensive banking union.

There will have to be debt restructuring for Italy and Greece and possibly other highly indebted countries.

Moreover, there has to be a move toward eurobonds as it would create a safe asset class that banks could hold.

The outright monetary transaction programme launched in September 2012 by ECB president, Mario Draghi, has been much more effective than Mr Wolf expected. Borrowing costs for periphery countries have narrowed to near record lows against the benchmark German bund.

However, Mr Wolf believes that the crisis could flare up again with Italy potentially pulling the trigger. The eurozone’s third largest economy is suffering from a chronic and worsening loss of competitiveness.

Economic imbalances were one of the main causes of the crisis over the past few years. Germany generated large current account surpluses with periphery member states from the advent of the single currency onwards.

When the financial meltdown occurred in 2009 and despite huge strains on the euro, it became apparent that a break-up, even partial, was almost impossible without unleashing a worldwide catastrophe.

This put the surplus countries in a position of absolute power when the subsequent crisis response negotiations were held.

Over the past three years, periphery countries eliminated their current account deficits, but this was not accompanied by any adjustment in Germany. And as long as this remains the case, future growth potential will be severely constrained, he added.