November 28, 2011
There is an inescapable sense that the euro zone is accelerating toward an uncertain and terrible end. At the Financial Times, Wolfgang Münchau writes that the euro zone has but days to save itself. At Bloomberg, Peter Boone and Simon Johnson say that the beginning of the single currency's end is upon us. And of course, The Economist continues to warn of the rising possibility of a break-up, and explains how one might occur, in the latest print edition. Everywhere one looks, there are portents of doom.
Except, that is, in the markets. Equities are soaring today, perhaps as a result of technical factors like short-covering but perhaps, some suggest, on hopes that the euro zone is finally rising to the challenge facing it. From whence cometh this hope?
Markets appear to see the prospect of salvation in reports of a new policy approach from Angela Merkel and Nicolas Sarkozy. The two are said to be putting together a framework for a rapid move toward greater fiscal integration. Such a plan would likely entail oversight of member-state budgets—and a corresponding loss of sovereignty—with the understanding that such ties would facilitate the way toward sovereign risk-sharing, as through euro bonds. The prospect of fiscal submission to the will of the euro zone's big powers is unlikely to appeal to peripheral countries, but many have already accepted some degree of oversight in exchange for emergency assistance, and the alternatives are likely to be far worse. To get around the need to go through a lengthy and uncertain treaty-change procedure, the plan may be drawn up along the lines of the Schengen agreement on geographic mobility. Countries may be able to sign on on a voluntary basis; it will not be an all or nothing approach. Given the scale of the current debt crisis, mutualisation of fiscal responsibilities won't fix the mess. The main hope for the plan is clearly that a major step toward better fiscal institutions will encourage the European Central Bank to substantially step up its intervention in bond markets.