More Window Dressing From Europe

European  Commission

Europe Agrees on Fiscal Oversight Rules – WSJ.com.

At first I was surprised that no one had commented on this article, but then I read past the headline. While the news appears promising, Europe did not actually take concrete steps to end its debt crisis.

When you cannot pass credible reforms, the next best thing to do is baffle everyone with  bs.  This is the WSJ’s characterization of the agreement:

A key element of plans to enforce economic-policy discipline in the euro zone fell into place Wednesday after a year of negotiations between European Parliament lawmakers and governments.

If someone keeps repeating the same nonsense over and over again, eventually someone will believe it. This is not what happened. The agreement is watered down from its original form and will do nothing to ensure budgetary discipline among Eurozone members.

What eurozone needed was a way to pool their debts and enforce strict limits on budgetary excess so that the divergence between the core and the periphery would narrow. What they agreed to is window dressing. Just an agreement for the sake of announcing an agreement.

The Eurozone countries have agreed to submit their budgets for the next fiscal year to the the European Commission by October 15. If the commission is not satisfied with  a country’s budget, it may argue publicly for changes and demand increased reporting of the nation’s financial, economic and fiscal statistics.

Oooh! Public arguments??!!! France and Spain are sooo scared! They will surely cut their budgets and reform their economies now.

The truth is that there is no enforcement mechanism and no penalties for countries running large deficits. Most importantly, there is no common debt pool. As such, countries like Germany will continue to borrow money at 1.6% while Spain is forced to pay 5.1%. This creates a tighter money policy in the countries that require economic growth fueling the core and periphery divide.

As long as the euro remains a false currency union, this divergence will continue to exist and so will the threat to the euro.

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3 thoughts on “More Window Dressing From Europe

  1. ” What eurozone needed was a way to pool their debts and enforce strict limits on budgetary excess ”

    ” pursuing a regional debt redemption fund into which some national debts could be commonly pooled and managed. ”

    I am the first to admit I do not understand it.

    Let us say they pooled the debts, what then ?
    I am not sure I understand the concept.
    I think it is simply not possible without more.

    How do they pay off these “pooled debts” ?

    Perhaps you make new rules ?

    http://ec.europa.eu/taxation_customs/taxation/gen_info/tax_policy/index_en.htm

    •In this Communication, the Commission reiterated its belief that there is no need for an across the board harmonisation of Member States’ tax systems. Provided that they respect EU rules, Member States are free to choose the tax systems that they consider most appropriate and according to their preferences.

    With pooled debts and new rules, Is there now a need for an across the board harmonisation of Member States’ tax systems. Or new rules that may be broken, so they are no longer free to choose their own tax system.

    Regardless, I still am curious

    If the Greeks cannot even collect taxes from the Greeks ?
    I would like to see others try.

    • quick note

      a “pooled debt” I imagine is joint and severable liability.
      where Germany would in effect be a surety for Greece.

      this would permit Greece to borrow more, and borrow more at a reduced rate.
      When it comes to being able to borrow, Its good for Greece, its Good for Germany because this borrowed money is coming from somewhere else. OK so borrowing, thats good.

      what about paying it back ?

      If I exhibited bad behavior by always spending more than I made, and you were doing OK and had some money in the bank, and we decided to pool our debts so I could get a better interest rate on my debt and I could also borrow more because you were my surety, why would I ever change, could you be assured that this time it would be differerent ?

      If I can borrow more at a lower rate, why wouldn’t I borrow more ?

      Lets say I didnt borrow more (not likely) and I changed my behavior and stopped borrowing, but did not pay you back,

      what if I had no money ?

      and what if you were promised a new tax system, where you could tax me and collect from me if I did not pay ?

      even if Germany is promised a new tax system, I imagine a German tax collector or France tax collector on behalf of EU, would have a difficult time collecting from a Greek citizen in Greece. Is Greece even able to collect from their own citizens ? Would a German EU tax collector be able to arrest and imprison a Greek non-payor ?

    • You’re correct. It’s a slippery slope, which is why it will never happen.

      Yet, in order to keep the currency union together the default risk of all of the governments must be harmonized, and you must pool the debts to accomplish that. It’s quite the conundrum.

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