The eurozone: beginning of the end game

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As renewed problems in Spain and Italy highlight the deteriorating situation across the eurozone, are we approaching the end game for this fundamentally flawed union?

The previously unthinkable idea that the euro zone might not last is now becoming a commonplace in political and economic discussions. But before asking whether, when and how all this will happen, we first need to see how we got here.

The European Union (not an optimum currency area) was launched with serious design faults, making the change ‘irreversible’,  and with no provision for countries to leave or be expelled from the union. Critically too, it was launched with no mechanism for dealing with the inevitable asymmetric shocks.

For a monetary union to survive, there need to be arrangements for ensuring that each country maintains fiscal discipline. Whilst recognising the need for occasional inter-state transfers, it is vital to  ensure that these do not tempt countries away from the path of prudence.

In reality, the ‘convergence’ assumption that, for example, Greek debt was as sound as German debt was a major cause of the problem. And the ineffectual Stability and Growth Pact was breached by both France and Germany.

This has been a disaster waiting to happen. A related one, which is still with us, involves the cost of pensions in the ageing populations across the EU. Corporate mergers these days are complicated by pension liabilities, and this is even more true for national mergers.

Eurostat figures in 2001 set out the range of projected future state pension costs in the EU member states for the next half century. They vary widely, particularly between countries with or without funded pension schemes. Little has been done to heed the warning spelt out some time back in a Chatham House paper, and implied by Eurostat, whose figures specifically assumed ‘unchanged policies’. Their 2009 analysis is even more frightening.

When it became obvious that Greece would have to exit, devalue or default, the EU authorities, instead of facing up to the long-term problem, simply threw money at it. This has, and will continue to become more and more expensive the longer the ‘end game’ is delayed.

Indeed there is now a risk that trying to save the eurozone experiment will threaten the future of the  European Union itself and even the solvency of its banking system.

The latest proposal would appear to involve a botched fiscal union, whatever this means. Politically, it will fall far short of a federal union (which would require a very different constitution) but may  offer less freedom on tax and expenditure being granted to provinces and cantons in existing federal countries.

But will anyone really accept central control of economic policy? Prospective members, before they sign up, will need to know a lot more about the real assets and liabilities of their fellow members.

Solvent outsiders (notably the UK and Sweden) will have to make sure that they protect their economies, and their financial markets in particular, from decisions taken by the inner group. Meanwhile the weaker members may have to choose between opting out, devaluing and defaulting – or some looser arrangement with the inner core, along Bretton Woods lines.

John Chown is an international tax adviser at Chown Dewhurst LLP. Along with Matthew Hancock MP, Roger Bootle of Capital Economics and other speakers, he is addressing an Institute of Economic Affairs/Bloomberg event on the eurozone on 18 April,


2 comments on The eurozone: beginning of the end game

  1. Warren Park says:

    A majority of the population in the UK want to leave the EU but of course to continue to have economic relations within the common market. Politicians are ignoring the wish and may soon face a backlash. Leaving the EU would place us in a position to better control our own destiny, reduce costs and take us out of this no man’s land we are now in. For example to start with we can take control of our borders and only admit economically advantagreous people that meet our economic needs. We could focus on rejecting and throwing out economically disadvantageous people who undermine the ability to work of the home population and add to the social security bill. UK citizens who are economically advantageous to other countries are still likely to be able to work in the EU or elsewhere. It is time to stop being in the half way house, from the EU perspective constantly complaining from the sidelines, from the UK public perspective, putting up with madness after madness.

  2. simon garmston says:

    I agree with Warren, the only reason the politicians keep trying to make the euro work is because they can’t admit they made a mistake!!! Clegg’s comments today say much about his desire and nothing about the obvious and commonsense!!!! The sooner Cameron stands up and does the right thing the better but he won’t, he’s half the man Maggie was, she wouldn’t have put up with this shambles…. really Europe needs us more than we need Europe!!! Yes 40% of our exports go there but, unless I’ve missed something, in or out of the EU, we’ll still be able to trade with them, and save billions in contributions…. we need out and we need it now!!!!


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