So for Eurosceptics everywhere, is the European Federal Government cat now well and truly out of the bag? Well, perhaps, but if so this is a pretty anaemic start. The package which Angela and Nicolas have cooked up between them was announced under the headline-friendly banner of ‘true economic governance’ and involves a kind of European economic cabinet, composed of all 17 heads of government, which would meet twice a year and might have some overall tax harmonisation and macro-economic powers yet to be agreed. Hmm, just what the ever deepening debt crisis needs - another EU committee…
Chancellor Merkel re-affirmed Germany’s commitment to support the Euro, but vetoed the most obvious way of doing so quickly - the Eurobond. The idea that Eurozone debt should now be issued in aggregate form rather than individually has been much mooted of late, and would in theory help to alleviate the immediate sovereign debt crises of Italy, Spain, Portugal et al by leavening their increasingly unsustainable bond yields with some nice stable, cheap German ones.
But while this approach has definite short-term appeal and would probably calm the markets for a while, the Germans are fundamentally right to be wary of it. Introduced now, the Eurobond would be a fudge, doing nothing to address the fundamental problems of making one currency suit the economic requirements of so many very different economies. And now even the mighty German growth engine seems to be stuttering it makes even less sense.
So Merkel says, not unreasonably, that she sees the issuing of Eurobonds as the last step in economic integration rather than the first. Neither would she be drawn on the question of whether the Germans would cough up any more cash for the various European bail out funds. So not much beef (or bratwurst) for the markets to chew on there.
The other aged wheeze which came back to life yesterday is the idea of a Robin Hood tax on financial transactions, to raise additional revenues. Unsurprisingly this has gone down like a lead balloon with investors this morning, with the FTSE 100 and DAX indices off by about 1% and shares in big banks including Barclays, BNP Paribas and Deutsche Bank down about 3%.
In theory a tiny percentage levy on every financial transaction is the perfect tax, raising vast sums automatically with very little downside. As its original proposer, Nobel laureate James Tobin, recognised way back in 1972. Unfortunately the practice is rather different, as it would only really work if imposed in every jurisdiction simultaneously - as near impossible to engineer as makes no difference. So applying such a tax unilaterally in the Eurozone might well result in a mass exodus of financial institutions - particularly as a handy, levy-free, global financial centre is conveniently situated just across the channel in the South East corner of England.
The overarching question facing the Eurozone governments however is not fiscal. Rather, it is to what extent the Euro, a political rather than economic construct in the first place, can be saved by politics when threatened by economics. But that’s a question that can only properly be answered after the fact…