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Bored of the Euro Zone

The Clash, one of the great bands of the 70s (if that isn’t an oxymoron), had a track on their debut album called “I’m so Bored with the USA”. It came back into my consciousness when reading about the latest EU goings on this week, a re-mix would now replace “USA” with “euro zone”.

On the plus side, it would appear that imminent euro zone break-up, or individual country exit, is off the agenda for the time being. The EU summit last month went a step closer to affirming a unified bank regulator (which would be the ECB in reality), plus in due course a banking union and unified deposit guarantee scheme.

How does this help the euro? Directly, not at all, but it does make the concept of genuine euro zone fiscal unity that much more of a real one, because the principle of sharing financial risk across country boundaries would have been established.

But to actually take the euro out of crisis mode requires fiscal integration, and the northern euro zone to underwrite the sovereign debtof the southern euro zone. Everyone knows this, we’ve debated it endlessly, there is nothing more to say on it. Monetary union requires fiscal union, which ultimately requires a form of political union.

Can financial markets stand the months and years it would take to get this new structure in place, assuming the EU can agree it will be going down this route (Angela Merkel’s domestic political scene allowing)?

Probably not, so the crisis sentiment will stay with us for months and years, furthering hindering economic recovery. And to think it was all so unnecessary — what price turning the clock back and not introducing the euro in the first place? A Greek sovereign default would have had the same impact on the world’s economy as the Argentinian one back in 2001 did, ie., minimal.

On another note, the Bank of England added £50 billion ($77.6 billion) to its quantitative easingprogram last week. Why stop there? Why not really try to get more bang for one’s buck and extend QE to 50% of the entire gilt market? Or maybe even 100 percetn? Everyone would be onto a winner then — particularly the government, now that it knows it can finance its budget deficit just by getting another arm of the public sector to print money. Simples. But to spare readers yet more déjà vu, I wont go into hyperinflation, the economy’s dependence on cheap funding and the “circle of money”, I’m sure everyone is bored with hearing about that too…

Professor Moorad Choudhry is Treasurer, Corporate Banking Division, Royal Bank of Scotland.

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