Germany must challenge Eurozone’s institutional gaps


It is not normal for Finance Ministers to be globally famous, but Wolfgang Shaeublehas gained quite the profile over the course of the crisis signifying his privileged position. Despite the creation of a full time Eurogroup President position (something quite French), the German focus on member state responsibility has been pretty high on the agenda throughout the current discussions. Indeed, the Stability and Growth Pact which did not provide stability or growth, once dismissed as ‘stupid’ by Romano Prodi, has been replaced with the Fiscal Compact (although, at least, it is both fiscal and compact).

The fiscal compact is still based upon the same principles of the SGP, first breached by Germany. That principle is that responsibility over budgets, stability and growth should be accountable to member state governments.

The problem arises when member states are not wholly responsible. Take Greece for example. Nobody will deny that there are institutional problems regarding inefficiency, corruption and tax avoidance. Nor will people deny that there were problems regarding the reliability of the financial figures provided by the New Democracy government in the mid 2000s. But what people can object to is that the crisis was the fault of the Greeks and it was exacerbated because of the actions of the Greek government.

Problems such as capital flight, the inability to change interest rates, the weakness of Greek bonds, the austerity measures and the way which banks were to be recapitalised were not totally the fault of the Government. What was at fault was not the member states, not even the permanency of the Eurogroup President, but the fact that the crisis was viewed as a Greek problem and not as a Eurozone problem.

The Eurozone needs to try and avoid the creation of huge imbalances which can create ‘asymmetric shocks’. In other words, the Eurozone needs to make sure that there are fewer imbalances which affect one part of the Eurozone when it doesn’t affect the whole Eurozone. It needs to correct the problems such as the lack of Eurobonds and plan an effective way to correct future asymmetric shocks. It is in nobody’s interests for crises to come into existence and in nobody’s interest for them to be exacerbated by institutional weaknesses. Perhaps it is time to look at how we can apply ‘subsidiarity’ to the Euro.

The problem is that if we view the Eurozone in the way that we have done previously, through judging member states, these deeper problems won’t be challenged. As well as this, if there is little effective bargaining done which focuses on the needs of the whole Eurozone then the problems which have previously been associated with the German approach will continue to exist. What the Eurozone needs to do now is to stay focussed on creating a plan which commands consensus and is focussed in the interest of all, not in the interest of particular member states.

This requires a political change too, not simply an economic one.

* Read the entire article posted to Lewis Miller’s blog.

About the Author

The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.

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