During their seventh gathering since the beginning of the recent crisis, G-20 leaders floated a number of ideas to save the eurozone, but they preferred to defer their necessary commitments again as has happened at the end of every summit. In their joint statement, they said they would act together for economic recovery but did not give a timetable. As such, it would not be impolite to call this summit “business as usual.”
Some of the ideas discussed during the meeting were not new. For example, Spain recently urged eurozone leaders to set up a fiscal authority to manage the finances of the union. Last year, the former head of the European Central Bank, Jean-Claude Trichet, also called for the creation of a European finance ministry with power over national budgets, but that idea was not welcomed by leaders and was even declared a fanciful and unrealistic project. However, if the present problems in Europe
are considered, the idea might still be called unrealistic, but not fanciful.
As a matter of fact, the main problem obstructing the expected functions of a common currency accepted by a group of countries in Europe
is the discrepancies of national economic policies among the same countries. Even if the harmonization of national economic policies had been realized in the beginning, the emergence of different economic problems after a period of time could make the implementation of this common package in every country impossible. This is what happened in the eurozone. Establishing a supranational authority which imposes the rules to force individual countries to implement that package is not realistic. The leaders of the eurozone countries still cannot even agree on much more practical issues to save the European economy. During the summit, similar things were observed among the four European members of the G-20.
It is not rational to blame them. It’s not just individual countries’ economic problems that are so different from each other, but political and social ones are as well, to say nothing of governments putting others countries’ problems ahead of their own. The reason is obvious. It is especially very difficult to convince jobless and poor people by saying that without solving common problems, it will be impossible to reach a solution on individual domestic ones.
There is another important point. In the United States, there is one federal Treasury and one Federal Reserve Bank, which functions like a central bank. However, in separate states – especially in terms of the implementation of fiscal practice – public expenditure policies and tax structures are not particularly similar. It means that even if there is a central fiscal authority and even if this authority imposes very strict rules and some sanctions for disobeying these rules, it is impossible to prevent irresponsible governments from doing wrong.
The bureaucratic difficulties and the financial cost of creating and operating such a big and important organization must also be taken into consideration. Anyone who observed how fast Brussels became a very complex and slow-moving bureaucratic machine, could easily foresee the small and sometimes big fights for important posts, conflicts of interest among countries, disputes on sharing the cost of operating this and that organization, et cetera. And, most importantly, who will make the rules?
The head of the European Central Bank, Mario Draghi, warned that the euro currency union is unsustainable without stronger political and financial ties among members. He also urged the creation of a Europe-wide banking regulator, another supranational authority. A similar idea was discussed during the recent G-20 summit in the form of an integrated banking system in the eurozone in order to calm not just European markets, but worldwide financial ones as well. It’s easy to say, but as difficult to realize as creating a fiscal authority. The European Central Bank has the ability to print money and ease the financial pressure on indebted countries if the leaders of the leading countries in the eurozone could just agree. Unfortunately, this is still not the case as was also observed during the recent summit.
If it is proper to repeat, the eurozone became a monetary union with a single currency and a single central bank which has the authority to issue that single currency and set interest rates like other autonomous central banks in other parts of the world. However, contrary to the “other parts of the world,” national governments in the zone continued to follow their fiscal policies and set their own budgets. This is the main reason for the European economic problem.
More than 10 years ago, some seasoned economists and politicians pointed out the difficulties of managing the finances of a monetary union by establishing merely a monetary authority without also establishing a fiscal authority to control the public expenditures of individual governments. However, if even this criticism seems right, it is not realistic. Only a political union, like the United States, can manage monetary and fiscal policies by having both monetary and fiscal authorities. And even in a political union, such as the U.S., these authorities cannot guarantee full control over the budgetary spending of local governments. This has proven that it was wrong in the beginning to aim for a political union by establishing a monetary union, instead of trying first to set up a political ahead of a monetary union; although this might not be the best solution, it would at least be a better solution.