A eurozone without an integrated fiscal system is “not sustainable”, a leading economist has warned, arguing that a political solution is the only way out of the 17-nation bloc’s debt crisis.
Economist Lino Briguglio, from the University of Malta’s Faculty of Economics, said tackling the eurozone’s debt crisis required greater fiscal integration, including the creation of a eurozone Finance Ministry, which could issue Eurobonds backed by “an integrated euro area”.
His views are backed by other experts who admit that greater fiscal integration is not without its difficulties.
“Whether or not individual members of the eurozone will accept a reduction in the sovereignty of their Ministry of Finance is yet to be seen but as things stand this seems to be the only practical sustainable solution,” Prof. Briguglio said.
Eurobonds will not come without any strings attached, according to Finance Minister Tonio Fenech, and it is these conditions that Malta will have to analyse before committing itself to any proposal.
“Malta not being a triple A economy may incur lower debt servicing costs with Eurobonds given that these will be backed by Europe’s triple A economies but it is also a question of what conditions will be imposed,” Mr Fenech said.
Germany and France, both triple A countries, might want greater tax harmonisation and stronger central economic governance as guarantees for agreeing to share the debt burden of Europe’s weaker economies, he said.
“Malta has always insisted on autonomy in determining income tax rates and conditions given its status as a periphery country. Eurobonds are what the markets want and we will be ready to discuss but it depends on the conditions attached to the package.”
The solutions adopted until now to tackle the debt problem incurred by the eurozone’s weak economies have done little to allay market fears. Greece needed a second bailout in the space of a year and, although they have not defaulted, markets are extremely jittery about the sovereign debt of Italy and Spain.
“A eurozone with a disintegrated fiscal system is not sustainable and even if a large, second or third, bailout for Portugal, Ireland, Italy, Greece and Spain is agreed upon, the problems are likely to recur,” Prof. Briguglio said. A payment default or restructuring of debt by the weak countries, he added, could seriously destabilise the whole European financial system given the exposure many European banks have to these countries. However, he believes Germany and France have too much at stake to allow the euro to crumble.
Prof. Briguglio said Eurobonds, backed up by the 17 countries, could replace the existing country bonds and possibly shave a part of the value of the country bonds.
Eurozone countries have adopted the euro as a common currency and although interest rates are set by the European Central Bank there is little economic and fiscal unity between the member states.
Taxation has been a definite no-go area for the European Union with member states jealously defending their patch and this has made the design of a crisis recovery in the eurozone a harder nut to crack, according to Labour MEP and economist Edward Scicluna.
Prof. Scicluna, vice president of the Committee on Economic and Monetary Affairs of the European Parliament, said the common currency area lacked some basic ingredients for its survival including a common fiscal framework.
“The problem with the search for a long-lasting economic remedy is purely political but many of the remedies are ruled out as politically unthinkable,” Prof. Scicluna said, acknowledging the difficulty greater integration poses for member states.
Experts summoned by the European Parliament have suggested a way forward, he added, that included the setting up of a European Monetary Fund with mandates to buy sovereign bonds on the secondary market and issue Eurobonds on the primary market.
Member state governments have so far rejected these proposals although the Commission said it was preparing a proposal on Eurobonds to present to the EP and the Council of Ministers.
“The issue of Eurobonds guaranteed by the eurozone would definitely settle the markets unless Germany itself becomes tainted and loses some of its triple A lustre like the US. Then it would be really Armageddon,” Prof. Scicluna said.
In the absence of a federal Europe – the implication of greater economic integration and tax harmonisation – the issuance of Eurobonds coupled with a financial transaction tax would go a long way to arrive at “a minimalist or quasi-common currency area”, he said. “The tax would be more saleable to the German voter but the Eurobond has to await a couple of crises until Germany yields.”
Stockbroker Jesmond Mizzi, joint managing director of Atlas JMFS Investment Services, shared the same hesitation as to the political willingness to launch Eurobonds.
“Eurobonds could be a solution but I do not see it happening immediately and not for some time, at least not before member states become more aligned fiscally and greater Europe-wide controls are imposed,” Mr Mizzi said.
Stock markets crashed on Thursday and performance only improved slightly on Friday as markets remained queasy.
The latest losses were a reaction to negative economic data indicating a slowdown in worldwide growth, Mr Mizzi said. “Although the eurozone’s debt crisis still lingers, markets fear a second recession.”
And that could only spell more bad news for the eurozone as it still grapples with a solution to its own internal problems.