Bernard Connolly i Letter to The Editor, Financial Times 96-11-18
Martin Wolf, discussing the issue of fiscal independence in Emu ("To fiscal independence", November 12), displays his customary' logical rigour and vigour in analysing the ways in which governments can lose their power to tax. And all his conclusions are, I think, correct. But there is an aspect of the article, cited by Martin Wolf, that I wrote with Brian Reading for Lombard Street Research that is not brought out in his analysis yet has an important bearing on the possibility of a successful Emu.
The point is that Emu Will indeed lead to a loss of political support to impose taxes. Existing budgetary austerity efforts in continental Europe are being sold on the argument that they are worth it to get into Emu. Additional austerity as a result of Emu will create a dangerous degree of popular disillusionment and resistance. Yet redoubled austerity efforts in Emu are precisely what the stability pact will require.
Something like budget balance, combined with absolutely low debt ratios (lower than those in any EU country other than Luxembourg, which has already been subject to monetary union constraints for many decades), does seem to be a demand that markets make of borrowers who do not individually control the money in which they borrow.
Of course, it can be argued, correctly, that countries in Emu would attempt to behave, by constructing ad hoc coalitions and alliances to pressure the European Central Bank, as though they did still have control over euro monetary policy. But this would mean a politicisation of monetary policy in Emu even worse than that which characterised the most frenzied days of the ERM. For the Bundesbank, this would be an unimaginable nightmare.
If making the British, French and Germans pay for Italy's debt would destroy Emu from the outset (as it would), so too would making the ECB the guarantor of the solvency of Italy, Belgium and indeed all the highly indebted EU countries.
This circle can be squared only by excluding Italy (and of course Greece) and relying on Franco-German geopolitical ambitions for Europe to make the peoples of the two big continental powers swallow the cost of paying for the debt of the other great outlier, Belgium. With debt an Emu-wide obligation, it would then be possible to reduce the Emu member governments to a fiscal status comparable to that of individual US states.
The only form of monetary union that would have even the faintest chance of achieving Emu's advertised stability objectives would be one that mimicked the US system. But that really does involve creating a country called Europe, or at least a country called Frankenreich.
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