Reads like a well conceived proposal, as, following Trichet a couple of weeks ago, more and more proposals emerge that actually make operational sense:

Spain wants euro zone fiscal authority

June 2 (Reuters) — Spain called on Saturday for a new fiscal euro zone authority which would harmonize national budgets and manage the block’s debts.

Prime Minister Mariano Rajoy said the authority was the answer to the European debt crisis and would go a long way in alleviating Spain’s woes as it would send a clear signal to investors that the single currency is an irreversible project.

It is not the first time a European leader has proposed creating such an authority but the woes and the size of Spain – a country deemed too big to fail – may now accelerate talks ahead of a EU summit on June 28-29.

The prospect of a Greek euro exit and Spain’s parlous finances have prompted EU policymakers to hurriedly consider measures such as a “banking union”.

Germany, the paymaster of the euro zone, and others insist such a move can only happen as part of a drive to much closer fiscal union and relinquishing of national sovereignty.

Overspending in the regions and troubles with a banking sector badly hit by a property crash four years ago have sent Spain’s borrowing costs to record highs and pushed the country closer to seeking an international bailout.

The risk premium investors demand to hold Spanish 10-year debt rather than German bonds rose to its highest since the launch of the euro – 548 basis points – on Friday.

The Spanish government, which has hiked taxes, slashed spending, cut social benefits and bailed out troubled banks, argues that there is little else it can do and the European Union should now act to ease the country’s liquidity concerns.

In private, senior Spanish officials have said this could be done by using European money to recapitalize directly ailing banks or though a direct intervention of the European Central Bank on the bond market.

They have also said the euro zone should quickly move towards a fiscal union to complete its 13-year monetary union but Rajoy went a step further by making a formal offer.

“The European Union needs to reinforce its architecture,” Rajoy said at an event in Sitges, in the north-eastern province of Catalonia. “This entails moving towards more integration, transferring more sovereignty, especially in the fiscal field.

“And this means a compromise to create a new European fiscal authority which would guide the fiscal policy in the euro zone, harmonize the fiscal policy of member states and enable a centralized control of (public) finances,” he added.

NO TABOOS

He also said the authority would be in charge of managing European debts and should be constituted by countries of the euro zone meeting strict conditions.

Earlier this week, ECB President Mario Draghi said EU leaders should break away from the incremental approach that has failed to get ahead of the euro zone debt crisis for more than two years and quickly clarify their vision for the future of the currency.

Adding to growing pressure for dramatic policy action at this month EU leaders’ summit, he warned that the Central Bank could not fill the policy vacuum.

The set-up of the new authority would require a change in the European Union treaties, a usually lengthy and politically painful process which requires ratification in the 27-member states of the bloc.

Germany has said further integration in Europe was required, including additional controls on national public finances, and was ready to consider revising the treaties if needed.

German chancellor Angela Merkel said there should be no taboos when discussing these questions.

A day after Berlin supported giving Spain an extra year to cut its deficit down to the 3 percent of GDP threshold, Merkel said it should be possible for countries that violate fiscal rules to be sued in the European Court of Justice.

BANKING UNION

Merkel also praised higher German wage deals and signaled flexibility on a financial transaction tax, in a sign she is open to new measures to boost growth in Europe.

The comments, at a conference of her Christian Democrats (CDU) in Berlin, show that she is ready to heed calls for Germany to do more for growth but wants other euro states to accept giving up sovereignty over their budgets in exchange.

“You can’t ask for euro bonds, but then not be prepared to take the next step towards closer integration,” she said. “We won’t be able to create a successful currency together this way.”

With the debt crisis now centered on Spain’s teetering banking sector, talks are also under way on creating a banking union in the euro zone based on a centralized supervision, a European deposit scheme and a central fund that would cope with failed lenders.

Germany’s finance ministry said on Friday it was willing to consider this option in a mid-term perspective.

Rajoy backed the idea on Saturday. He also said that the government would explain before the end of June how it will recapitalize Spain’s troubled banking sector, which is currently being reviewed by independent auditors.

Spain has picked the “Big Four” accounting firms KPMG, PwC, Deloitte and Ernst & Young to carry a full, individual audit of its ailing banks, a source with knowledge of the decision told Reuters on Saturday.

8 Responses

  1. “a usually lengthy and politically painful process which requires ratification in the 27-member states of the bloc.”

    This is not yet a done deal.

    When they wanted a european constitution France and The Netherlands blocked it via referenda. Others did not even have to vote anymore. A few years later however they made the Lisbon Treaty, that basically copied the previously proposed constitution and simply avoided any referenda.

    I think the simple announcement that all parties agree to work on this would already move markets significantly.

    1. @walter, For a while. But it all continues to be “potentially good for stocks, definitely bad for people.”

      How much buffer capacity do the people have? The dominant lobbies seem to neither know nor care. Presumed risks are trifling compared to outright uncertainties. The difference between theory & practice could spike dramatically.

      1. @WARREN MOSLER, Don’t get me wrong. On a day like this, after bad job numbers in the US, huge short positions in the eur/usd, any bit of news that increases euro survival supports a risk on move.

        I agree that the disconnect between population and politicians is huge. Unfortunately it seems to be a global problem and returning during history.
        Where the buffer limits are I don’t know. I do have the impression though that under such circumstances the gap between official data and reality tends to widen.

        Am I correct that you are getting more bullish on the euro?
        (Trichet proposal, ECB supporting entire banking system, Spain’s request for fiscal authority)

  2. Europeans ever had an attraction for the Sisyphean task of a politically united Europe.

    It would be much less costly and much more prosperity enabling to recognize diversity as a source of wealth.

    And recognize nations as fundamental processes for human societies resilience and development.

    And reform the Eurosystem to a multi-national currency system.

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