Recently on PolicyMic, I criticized European Union Commission President Jose Manuel Barroso for an ill-advised comment regarding the stability of the European economy. While I stand by my earlier criticisms, my estimation of Barroso has greatly improved, since he now seems to be agreeing with me; he must be an avid reader of PolicyMic.
This past week, Barroso announced that the European Commission is preparing a proposal for the creation of “Eurobonds,” an idea that I suggested would be a preferable solution to Europe’s financial worries about two months ago in another PolicyMic article. A fully realized European bond would allow all the participating euro zone countries to borrow at the same rate. Smaller countries would be able to borrow based on the market’s confidence in the more economically developed states. Such a step would represent a dramatic leap forward in European fiscal policy and would likely spur further integration in many other related areas such as taxation and expenditure.
A more centralized regulation of member-state finances would give the EU greater power to restrict unsustainable expenditure by the more profligate states while simultaneously avoiding a high and painful taxation, which is a potential unpleasant side-effect of the common market. Finally, this solution would mean that in the next economic depression, the markets could be certain that there will always be funds available to service European debt. Collectively, the EU is the world’s largest economy, and a unified fiscal policy would take advantage of this size to stabilize the interest rates on government borrowing.
Of course, the large, economically dominant states in the euro zone have opposed the idea since a European bond would likely see their interest rates rise to cover the additional risk of the more vulnerable members. And there is always the hurdle of the right-wing, euro-skeptic British government. Even though many EU countries have not adopted the euro, the Council of Ministers and the European Council must approve any new policy emerging from the Commission, and both these bodies consist of self-interested delegates from all EU member states. Thus far, British Prime Minister David Cameron has not made it clear where his government stands on the idea of European bonds but you can be certain that whatever the Commission proposes, Britain will not participate.
The recent crisis in the euro zone has served as further fuel for the euro-skeptic elements of the British government and it is true that the UK has experienced certain advantages by not adopting the euro. The UK is able to devalue its currency at will in order to address inflation and it can engage in quantitative easing to stimulate the economy. However, before we write off the euro zone entirely, we should examine the growth figures for the entire EU. Out of the 27 EU members, Britain is currently projected to rank 20th in terms of economic growth for 2011. To put it another way, if we exclude the PIIGS countries, all the other euro zone states are growing more rapidly than the UK despite being embroiled in the largest financial crisis since the EU’s inception. Britain has not even suffered the burden of the Greek bailout, and under the current government, its economic growth is expected to surpass only Cyprus and Romania.
Photo Credit: Ozchin