Tuesday 9 August 2011

Eurozone powers and limits (Updated)

Admittedly, the decisions by the governments of Italy and Spain and the the consequent interventions by the European Central Bank in the secondary bond markets brought relief to these Mediterranean countries. The president of the European Council welcomed the decisions:

Herman Van Rompuy, President of the European Council, welcomes the decisions taken to strengthen fiscal discipline and growth; Brussels, 8 August 2011 (EUCO 58/11)

However, stock markets generally and on Wall Street plunged on Monday (Deutsche Welle), and Asian stocks continued tumbling on Tuesday (BBC News).

Thus, the global outlook has taken a turn for the worse.


Reiterating the need for speedy adoption and implementation by the euro area member states of the decisions of the 21 July 2011 eurozone summit is not going to stop contagion in its tracks.

In a 3 August 2011 note Why Spain and Italy are under attack and how to defend them, Willem Buiter (Citigroup) discussed the need for structural reform in the product and labour markets of Spain and Italy, the shortcomings of the EFSF and the need for the ECB to intervene. Italy and Spain have reacted, the European Central Bank has acted, but the remaining flaws of the improved EFSF and ESM seem to be off limits for European politicians.

President José Manuel Barroso's letter to the heads of state or government of the eurozone countries has been suspected of bad timing (FT Brussels blog) and accused of causing the bond market plunge (BBC Business News, before update). Most of all, Barroso's letter has met with rejection from European political leaders and their spokespersons.

The European leaders have much on their plate, as they try to calm sentiments, secure passage of the agreed measures, explain complex issues to increasingly distrustful publics and to remain electable.

However, in the long run the refusal of the governments to embark on an open discussion about the political and economic fundamentals of the economic and monetary union (EMU) may end up doing more harm than good.

Only a federal solution can provide the Union with the effective tools it requires, declared the liberal leader Guy Verhofstadt.

Update 9 August 2011: Stanley Pignal on the FT Brussels blog has an entry about Otmar Issing's opinion piece in the Financial Times. Democratic legitimacy is the sine qua non for the political and fiscal union Europeans and their euro need, is my reading. Let's get talking about taking the right decisions at the right level, in a democratic manner.

Ralf Grahn

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