Thursday, December 08, 2011

Europe Tests Meaning Of "Union" With Bold Plan

I underestimated the audacity of Europe's senior political leadership.  I really thought that fractious nationalistic debates would bog down any progress toward a true Continental superstate.  Europe may be about to prove me wrong.  All of the eurozone members and a bunch more in the EU are now willing to force a true fiscal union through the EU's existing governance structures. 

There is no guarantee that this bold re-imagining of the EU's role can succeed.  The UK and others can always throw enough parliamentary monkey wrenches into the process to delay ratification of a new EU treaty.  One may now ask what Great Britain stands to gain by sabotaging a tighter EU.  The pound sterling's independence from the euro would certainly be put to the test by a reformed EU/eurozone where the UK is still a legacy EU member.  Any significant delay for this new treaty (say, more than a few weeks) will give European capital markets reason to choke on new debt issues.  Asian markets are responding negatively to the proposed treaty's uncertain chances of success. 

The importance of a fiscal union is not lost on American leaders familiar with debt ceiling negotiations.  A truly federal state can spread the consequences of taxation and debt finance decisions over all of its citizens without asking constituent states for ratification.  A fiscally unified EU paves the way for an inflationary solution to Europe's sovereign debt problems without resorting to the Fed's dollar swaps.  The new EU will have no trouble rewriting the ECB's mandate and empowering it to print money for bank bailouts; an enabling effort via increased IMF contributions is underway.  Europe and America are now on a clear course toward some sort of mutual currency devaluation via high inflation.