Next Step Down: From the European Union To The Transfer Union

Tuesday, September 07, 2010

Emerging plans to install a EU Treasury that can issue supranational debt among plans for stronger economic cohesion in the EU are met with heavy flak from many sides while the Union faces continuing strong headwinds from a languishing economy and persistently high unemployment.
The planned debt issuing agency also strives for higher fiscal reintegration, an issue destined to fill many heated discussions among the EU strongmen France, Germany and the UK.
From the Telegraph:
Yves Leterme, the Belgian prime minister and current holder of the rotating EU presidency, plans to propose a new machinery to prevent a repeat of Europe's sovereign bond crisis.
"This should evolve into a European debt agency able to issue debt for all member states. Everybody will gain from the mechanism," he said at the annual Ambrosetti conference of global policymakers at Lake Como, Italy. The idea would be the next logical step beyond the eurozone's €440bn bail-out fund agreed in May.
"This will be a very effective tool to harmonise budget policies, but the way ahead may be very tough," he said. Germany is likely to balk at talk of an EU debt union, or "Transferunion" as it is described in Gothic terms by Germany's tabloid press.
While the dear European leader did not mention where the money for this EU Treasury will come from - even a debt issuing agency needs some - readers may be reminded that the EU has begun to ask for new taxes to raise money for its budget plans. So far the EU is primarily financed from a share of member states VAT income.
One idea for direct EU taxes is the hotly discussed banking tax and I can remember that carbon taxes may become a viability too. We can expect politicians to be most creative when levying new taxes on an already heavily strained populace.
Leterme is not the ideal person to talk about further European integration plans anyway. Over the weekend Belgium officially abandoned coalition talks, renewing calls for a division of the country along ethnic lines.
This integration stuff does not even work at the the very heart of the EU in times when countries find out that future financing needs will evolve into an interest rate competition among member states.
A EU Treasury will not help either.

How do you price a supranational EU bond that has the backing of 27 diverse countries with widely different fiscal and economic policies? As I was always wary as how to the Eurozone would merge a hard Deutsche Mark with a soft Italian Lira and still pass it off as a hard currency this is now the crucial question: How do you get a low yield for something that has subprime components?
IMHO this Gordian knot will be impossible to untangle.
But back to a possible secession in Belgium, before moving on to more EU financial issues.
From the EUobserver:
Talks on forming a new government in Belgium collapsed over the weekend, leading a series of French-speaking politicians to raise the normally-taboo subject of a possible break-up of the country.
King Albert on September 4 accepted the resignation of French-speaking Socialist leader Elio Di Rupo as lead negotiator after he failed to bring the seven-party talks to an agreement on reforming the state, a precondition for establishing a coalition government.
Flemish papers have suggested that the comments are more of a tactic as negotiations go to the wire, particularly over the revised financing of debt-ridden Brussels, with Flemish politicians calling for clearer commitments from the Francophones such as linking financial reform of Brussels with overall reform of the state.
Back to the EU's money worries.
The Daily Bell, a Swiss-based libertarian online commentary media, calls the plan for a EU Treasury "overkill" in its headline and said:
We find much the same elements at work when it comes to the EU, which is being forced into existence as a super-state despite the resistance of those who will have to live under its increasingly pathological polity.
Of course there are plenty of justifications being floated for the EU's continued expansion, despite the evident incompetence and corruption of the Brussel's bureaucracy. These justifications are both practical and theoretical and can be found throughout the West – in Britain and the US as well as Europe. Some of it is blunt but some is quite elaborate.
The cash strapped member states of the Eurozone can meanwhile hope that the European Central Bank (ECB) will keep playing/printing more music/money.
Austrian ECB Governor Ewald Nowotny told Bloomberg on Monday that the ECB will leave the liquidity spigots wide open for the rest of the year and policy makers would not discuss tightening measures before Q1 2011.
It is dearly needed. Zerohedge picked up the Financial Times to come up with exploding financing needs in the EU where debt issuance will double the August figure in September.
From Zerohedge, whose comments are entirely endorsed by this blog:
Eurozone governments will try to raise €80bn ($103bn) in September compared with new bond issuance of €43bn in August. Spain is expected to attempt to borrow €7bn in September compared with €3.5bn in August...
Looks like a perfect storm, doesn't it?
The newly created European Systemic Risk Board and 3 other agencies will not douse any flames soon either. After a principle agreement by the European Parliament last Thursday national interests entered the discussion about the operating mode and other details in Monday's round of talks in the EU economic task force.
As much as is known by now, the new regulatory body's decisions can be appealed by the country concerned. Sounds like another talk shop to me.
If you now have a buzzing mind from so many different institutions working on all ends to mitigate the crisis we share a mind. Lots of new panels that are not expected to face the harsh wind of reality anytime soon before citizen's protests will engulf a good part of Europe.
Only today saw new strikes in the UK (London tube employees) and France will go on a 24-hour general strike on Tuesday.
So much about the sovereign satisfaction with government performance.
The bigwigs in Brussels stay their course of bigger government. This so-called EU economic task force - lacking any democratic eligibility as I cannot remember that any EU citizen transferred his vote to this committee - plans nothing else than fiscal, social spending and labor laws.
On the way to there the body wants to introduce rules for deficit transgressors, after those established in the Maastricht Treaty were never used in the first place.
This may result from a new realization that it would be the final blow to burden a deficit-laden nation with pro-cyclical fines.
Get more details and explanations from the EUobserver:

While in principle all member states back the idea of tougher discipline for countries that break any new rules put in place, there are wide divergences as to what form such sanctions should take. Germany backs the idea of a suspension of voting rights in the Council.
This is an unpopular position as it would likely require treaty change, although Finland appears to have signed up to the idea.
"Finland and Germany will negotiate very hard in the Van Rompuy group (to ensure) that sanctions are imposed not after the three percent limit has been exceeded for a long time, but that we learn from history and act quickly and decisively," German chancellor Angela Merkel told reporters after speaking to Prime Minister Mari Kiviniemi last week.
Meanwhile, the lesser sanctions being mooted, such as a restriction on structural funds, are raising hackles in the eastern, poorer states, who receive the bulk of such monies. The wealthier West would be less likely to be hurt by such a penalty, as they do not receive as much from these sources, and Poland and other newer member states have in the last few weeks given notice that this is a red line for them.
Other proposals have also provoked much debate. EU leaders have backed plans to submit budget outlines to Brussels, but drew the line at handing over the full draft budget to the EU commission for approval before national parliaments have had their say.
Finally, and perhaps most controversially, Mr Van Rompuy's wish to reduce divergences in competitiveness is likely to hit the biggest hurdles as this points towards a harmonisation of taxation, social spending and labour laws.
But such big concepts may have to be put on the back burner even before they begin to provoke controversy as leaders return to a reality not indistinct from the height of the sovereign debt crisis that shook the union in the spring.
Although Greece has been guaranteed a €110-billion lifeline and the rest of the eurozone €750 billion, bond yields continue to be exacting, with investors looking for nine percentage points more in interest to buy Greek issuances than for their German equivalent, similar to the situation Athens found itself in a few months ago, while Ireland is up 3.5 percent on German bonds...
The shift of private debt from the banks to the state has left many in a grim situation. Dublin in particular faces the black hole of debt that is the nationalised Anglo Irish Bank. If the commercial property market continues to suffer, the bank could require as much as €35 billion, a likelihood that has resulting in Ireland's credit rating to be ratcheted downward.
Finally the big unknown is how citizens will react. Already the austerity measures imposed on the so-called PIIGS economies has provoked widespread opposition, and, in Greece, civil unrest.
EU leaders have yet to find out that the concept of a union always looks good in the bright sunshine of a strong economy. But Europe is rather faced with a situation where "every man for himself" on a national level will soon be the norm.


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