Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
We've seen lots of ideas on how to run a fiscal union. Eurobonds, partial pooling of sovereign debt up to the Maastricht debt limit, an agressively financed EIB, ECB monetizing deficits, outright fiscal transfers, and so on.

What they all have in common is that they've all been shot down. A big reason for this seems to be that people consider them unfair: it looks like the frugal people who've kept their houses in order are going to have to pay for the lazy wastrels. Even if the real macro story is a bit different from this (to say the least), this is an incredibly powerful narrative, which means it's important to figure out some way to get around it.

So I've figured out another mechanism for fiscal union - Migeru didn't like it much, but I'd like to hear your opinions. Keep in mind that the idea is not to create a perfect fiscal solution, but something that works good enough to actually be implemented and transform the EMU from a mass unemployment-producing machine into something reasonably functional.

The idea is that we create something we call the European Fiscal Mechanism, the EFM. This is an independent organization which is tasked with estimating the aggregate European output gap. If it detects such an output gap, it injects fiscal assets (i.e. cash) into the state budgets of all Euro member nations, in some way which is seen as fair. Say, a country which makes up 20% of the Euro economy gets 20% of the cash, no matter if it has an actual output gap or not.

If the crisis, like the current one, is a result of current account imbalances, spending in current account surplus nations without output gaps will help too, as it will push inflation in those countries and help get the unit labor costs in line with those in the countries with current account deficits.

The money is only disbursed from the EFM to the member state if it is spent on something. Spending it on paying down state debt does not qualify as spending in this view, but spending it on infrastructure, social programs, tax cuts and so on does.

The EFM raises money for disbursement by selling long-dated bonds into the market. All its bonds are guaranteed by the ECB. Another identical option would be direct borrowing from the ECB, but this would set off even more red lights, so we shall in this way "sanctify the money through the bid/ask spread of investment banks".

The EFM will gradually and over time manage its debt by refinancing its current bonds with new bonds when the old ones mature, and also if needed have priority access to a certain fraction of the annual the EU budget, i.e. the money which is extracted from the member states via the membership fee. This will also have the added bonus of forcing the EU to cut useless and wasteful spending programs, which is sure to be both useful and popular.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Tue Jul 22nd, 2014 at 06:03:57 PM EST
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