Since early November, Johan Van Overtveldt, author of the new book, The End of the Euro, has been blogging here about the eurozone crisis.
The European summit of December 8–9 was widely considered the last chance for the leaders of the eurozone to come up with clear answers to the crisis that has plagued Europe’s monetary union for more than two years now. The results were extremely disappointing.
There’s hardly anybody left who does not recognize that the euro needs a full-blown, truly empowered political union to give the currency the institutional framework that is so urgently needed. Since that kind of political union is absolutely impossible to bring about at this moment in time, the political leaders of the euro countries are trying to agree on lesser solutions, e.g. explicit and binding agreements regarding those policy issues that are crucial to stabilizing the monetary union in the long run.
Three policy issues stand out here: first, the evolution of budget deficits and government debt; second, regulation of the banking sector; and third, supervision of the international competitive position of each of the eurozone members. This last issue is too often overlooked. The loss of international competitiveness drives a country’s current account into the red, and makes that dependent on foreign capital, a situation that has proved to be highly unstable in recent years. Neither banking regulation nor competitiveness was really on the agenda of the summit. Budgetary rules were.
On December 8–9, 26 the EU countries (with the UK breaking ranks, a story of its own) agreed to write into their constitution a requirement for each country to balance its budget. If countries don’t follow the rules and reach budget deficits equal to 3 percent of GDP, automatic sanctions (that is, fines) will be imposed. However, a majority of the EU heads of state can decide to eliminate the sanctions again at a later date. It’s hard to conclude that the new rules are truly binding, and that a real transfer of sovereignty from the national to the European level has been agreed upon. Without such an agreement, the eurozone crisis will only continue, and continue to deepen.