The only quote worth noting from the just delivered speech by ECB executive board member José Manuel González-Páramo is the following: "We cannot completely delegate governance to financial markets. The euro area is the world’s second largest monetary area. It cannot depend solely on the opinions of ratings agencies and markets. It needs economic governance arrangements that are preventive and linear. This underscores my central point that a much more comprehensive approach to economic governance is now the priority for the euro area. And this means more economic and financial integration for the euro area, with a significant transfer of sovereignty to the EMU level over fiscal, structural and financial policies." In other words, in order to protect people from the "stupidity" of rating agencies which after years of lying have finally started telling the truth, and the market which does what it always does, and punishes those who fail, Europe must be prepared to give up "significant sovereignty" (sounds better than Anschluss) to Europe's "betters" which is another way of saying 'he who pays the piper calls the tune." And "he" in this case is, of course, Germany. In other words, courtesy of one failed monetary experiment Germany will succeed, without sheeding one drop of blood, where it failed rather historically some 70 years ago.
I have three main propositions.
First, membership of EMU entails much deeper policy changes than were originally realised. In 1991, Hans Tietmeyer, the former President of the Bundesbank, remarked that “monetary union is not just a technical matter. It is in itself, to some extent, a political union”. What has become clear is that countries that adopt the euro as their currency are required to adjust fundamentally the way in which they conduct their economic and financial policies. At the same time, ensuring overall stability requires far-reaching coordination in economic and financial governance. It would be difficult to understand that in the world’s second largest monetary area governance is outsourced solely to the markets and ratings agencies. Effective governance of an economic area of such importance requires much closer economic and financial union.
Second, in response to the crisis, a much more radical change in euro area governance has taken place than many observers seem to acknowledge. Europe tends to reform incrementally, at times creating frustration at the pace of change. But those increments now add up to a fundamental overhaul of its economic management. The reasons this has not been more effective in calming the crisis are complex, but communication stands out among them: In “selling” their reforms, euro area authorities are forced to walk a tightrope between the expectations of national electorates and financial markets, and risk satisfying neither. The only solution to this democracy-market dialectic is, again, much closer economic and financial union.
Third, and contrary to a strand of current thinking, the Treaty prohibition on monetary financing is supporting rather than threatening euro area integration. In the euro area, the central bank is “doubly removed” from the political systems of individual countries: it is not only constitutionally independent, but also elevated to the supranational level. Euro area governments cannot expect the ECB to finance public deficits. As a result, they must be commensurately more ambitious in their economic policies and more disciplined in their management of public finances to support their debt levels. Moreover, given the prohibition on monetary financing, having a banking sector which can support growth and provide adequate financing to the real economy in Europe requires a stronger regulatory and governance framework, so as to prevent negative feedback loops between banks and sovereigns. By forcing policymakers to focus their reform efforts on the right priorities the monetary financing prohibition offers an incentive to closer economic and financial union.
