Merkozy plan is completely wrong-headed

All eyes are on the eurozone summit this week and the proposals by France and Germany to create a new ‘fiscal union’ to stabilise the euro and prevent a future crisis. The details of this plan are still sketchy but the key elements seem to be: the enforcement of new rules intended to prevent countries from running excessive budget deficits (more than 3% of GDP) which will be backed up automatic sanctions, together with a guarantee that private investors will not be asked to take losses on their loans in the future. Importantly it does not include the creation of eurobonds or a commitment that the ECB will buy up the bonds of troubled nations such as Italy and Spain. So far the financial markets seem to have been impressed, with Italian bond yields falling sharply yesterday. Setting aside the very real doubts about whether the scheme will get the agreement of the 17 euro states (or 27 EU ones), let us imagine that it does come into effect. What would this mean? And would it prevent a recurrence of the current problems? The answer has to be that it would probably be a disaster.

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