The EU's Move Towards Fiscal Union

Author:Mr Adriaan Struijk
Profession:Freemont Group

Europe is the world's biggest economy. It is threatened, however, by bank and government debt defaults. It is growing old and has far more social spending obligations than it can afford. And, if Europe goes into a deep or prolonged economic slump, the rest of the world follows because Europe is a big market, not only for Asia but also for America. After a marathon meeting that started on December 8, 2011, the European Union (EU) member states agreed to create an intergovernmental treaty to forge stricter budgetary controls. Britain has opted to remain out of the treaty. Markets were up the following day. Before the meeting, so we are told, Europeans were in disarray. But the day after, apparently, they have got things all sorted out – again. Before the adoption of the euro by the core EU countries 10 years ago, the detractors of the wisdom to create a monetary union made the case that a monetary union without a political union would not work. They warned of the need for a central Euro-government – to control national budgets and taxation. And, look now: it was not the hedge fund managers and bond traders who caused the trouble in the eurozone; they merely exposed the fundamental problems with the currency. It was the utter failure of the eurozone countries to observe the rules of the 1992 Maastricht Treaty. It was the refusal of Greeks and the PIIGS – Portugal, Italy, Ireland, Greece and Spain – economies to control their spending or to reform their social security systems. How was the creation of the euro the reason for the current problems in sovereign PIIGS bond markets? Why have the European banks put so much money into buying the Greek bonds and not into some other shaky country's bonds? After all, there are plenty of other countries that spend above their means, where the banks could have invested their funds. What is the difference between Greece and any other risky country? There are two big risks to consider while investing anywhere. The first thing to consider is the fiscal and political situation. If the country starts regulating the market to death and spending like there is no tomorrow, then that is a problem. The second big risk is the central bank. If the currency goes out of control due to unrelenting expansion of the money supply, the bonds it issues will not be worth much. But with a European monetary union, investors did not have to worry about Greece's central bank any longer. As a result, one major risk was completely off the...

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