Euro Flaws to Remain: The Next Crisis Won’t Be Far Behind

 A Comment in today’s US print edition of the Financial Times (See ‘Better no fiscal union then a flawed one‘, by Wolfgang Munchau) reports a little known fact that became apparent over the weekend. It seems that at last week’s EU summit, a small almost innocuous statement was made that in effect kills off any chance of joint EURO insurance for bank deposits. This prevents the banking union that was a technical requirement to support a more insured, secure, euro zone. It seems the Germans continue to stand against insuring profligate states (quite rightly, too, in my mind).   

The article calls out how “fiscal union” means different things to different people and nations. In Germany it means more consistent rules and enforcement of those rules. This would mean more consistency and equitable budgets by national states (which today is not the case). For others, such as France, it means more shared responsibility such as joint insurance of bank deposits. In other words, even the goal is not well understood, let alone the path to get where ever “there” is.

With this small and mostly unreported statement made, the euro experiment will continue half-baked. Massive trade imbalances between the productive exporting north and the sunbaked import centric south will continue, and in fact worsen. Productivity differentials may equalize a little, due to the austerity levels pressed on the southern states, but this cannot last – politically let alone economically.  So productivity differentials will like resume, and increase in 2016. In other words, the pressure cooker might be off boiling point at present, but it won’t take much to trigger a temperature increase that would once more trigger another crisis. It might be Greece; it could be Italy or Spain. Even Britain’s renegotiation, whatever that might entail, could be the catalyst…



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