InvestNow News – 29th May – AMP Capital – Inching towards greater fiscal integration in Europe
28th May – Bevan Graham – Managing Director and Chief Economist,
The European sovereign debt crisis that reached its zenith over the period 2010-12 exposed a key structural weakness in the construct of the Eurozone common currency – the lack of a cohesive region-wide fiscal strategy. The Eurozone muddled through, though not without some tense moments, but fiscally-speaking ended up wasting the ‘best’ crisis since the Euro was launched.
Since then various populist governments across the region have provided further tests to stability as they have sought to break the fiscal rules and the patience of Brussels.
At these times we have consistently argued that it was inevitable that Europe would have to bite the bullet, sort out its differences and get its fiscal act together. That was especially necessary if the next economic/financial crisis materialised before Eurozone monetary policy had normalised to a significant extent. It has also seemed to us that part of the solution would require some degree of region-wide risk sharing that comes with debt mutualisation.
Little did we know this would all be tested less than a decade later. The COVID-19 recession is the deepest in living memory, and without making any meaningful progress towards normalisation, the European Central Bank is pushing on a string.
That, as in most parts of the world, is leaving fiscal policy to do the stimulatory heavy-lifting. The recent joint German-Franco proposal for a €500 billion Recovery Fund, financed through the European Union (EU) budget by the issuance of common bonds, is therefore both welcome and timely.