Business World

Wednesday 21 March 2018

Europe may yet try and save itself ... with fudge

AT first sight, it appears that there are two ways this can play out.

Firstly, the euro breaks up, Ireland goes back to the punt, we default on a mountain of debt and the country starts to look like something out of zombie movie 28 Days Later. For a bit. We don't know how long. That's kind of terrifying.

Or we sign up for a much more serious stab at Europe -- a giant pan-European Department of Finance, harmonised tax rates and Berlin rule. Yikes.

But there is another way. The way of fudge.

This would see a few more token bits of European integration -- but we'd still be allowed to have bendy bananas or Cornish pasties.

The way of fudge would not see the creation of eurobonds -- despite Friday's news that the EU was looking at draft legislation for the issuance of bonds and (stop the lights) the compilation of a report.

Eurobonds are to Germans what Anglo Irish Bank is to us. Instead of eurobonds there would be a guarantee system where Europe as a whole pledges to backstop the debt of its nations. It looks like an elephant, tastes like an elephant . . . but in fact it's something completely different.

Policy wonks have even floated the idea of having sliding levels of guarantee dependent on the debt-to-GDP ratio. Europe would give the thumbs up on the first 60 per cent and you're on your own for the remaining bit. That'd speed up getting the house in order.

But the other big fudge is already there. Back in the days when Louis Walsh could still move his forehead, countries were locked into a system where their deficit couldn't be more than three per cent of GDP. States couldn't borrow more than 60 per cent of GDP. It was part of the small print in one of the treaties we signed up for.

Breaking the 'stability and growth rules' would lead to a good solid bog washing. It would be the economic equivalent of having your head flushed down the loo. Quite a good deterrent . . . until the French and Germans ignored it and the rules were relaxed in 2005. All to do with "flexibility", they said.

Last March the Stability and Growth Pact was tweaked with "quasi-automatic" fines for countries that muck about. Quasi-automatic? It was about as ferocious as a butterfly covered in bubble wrap and the new rules are still meandering their way through the political system.

Giving the Stability and Growth Pact actual claws and making it really scary -- think Hellboy scary -- would be a actual step forward. It might go a long way towards calming German nerves about bankrolling the rest of Europe.

With an apparent inability to make grand gestures, fudge seems the most likely way forward . . . when the Eurocrats finally get home from the beaches.

Sunday Indo Business

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