While investors and economists say tighter fiscal ties and increased transfers to the financially weak euro states will be needed to end the financial contagion, purchases of Italian and Spanish debt that Royal Bank of Scotland Group estimates may reach €850 billion threaten fresh political fault lines. “This huge-risk pooling exercise will not come easily and the risk of political fallout will be large,” Jacques Cailloux, chief European economist at RBS, wrote in a note.
“This might be the necessary and painful step required to pave the way for the creation of a common debt instrument, the quid pro quo for this might be the loss of fiscal sovereignty.”
The unwillingness of euro leaders to forge a US-style federal fiscal union with the monetary union that now joins 17 states has been a handicap that has fueled economic imbalances in the region, analysts and investors including billionaire George Soros have said. Germany, the biggest euro economy, has long resisted such a set-up, saying it would discourage member states from enforcing budgetary rigour.
The outcome of Europe’s crisis-fighting effort may determine if the euro evolves or runs aground on the concern its members are too diverse to be united in one currency if some aren’t willing to abide by the rules and others won’t aid those in trouble. German parliamentary leaders rejected a bid last week by European Commission President Jose Barroso to increase the euro’s €440bn bailout fund, the EFSF, which was set up last year to prevent the crisis that began in Greece from spreading. About €256bn has been committed to Greece, Ireland and Portugal.
A Merkel coalition ally, the Christian Social Union, “will not support this,” Horst Seehofer, chairman of the party, said yesterday.
In Italy, Prime Minister Silvio Berlusconi is being criticised for effectively relinquishing sovereignty to win outside financial support.
Signatories of 1991’s Maastricht Treaty, which created the currency bloc, dodged the issue of economic union as countries insisted on maintaining control over their own purse-strings and tax policies. In doing so, they ignored the Bundesbank’s call for a “comprehensive political union’” and instead imposed limits on budgets and debts that have never been enforced.