Simmereing Stew; Italy's Finance Minister Joins "United States of Europe" Parade; Germany's "5 Wise Men" Argue for Grexit

Italy Seeks Political Union

As expected, Italy has joined the "United States of Europe" parade. And also as expected, some from Germany want no part of it. Let's start with Italy.

Italy's finance minister, Pier Carlo Padoan calls for ‘Political Union’ to Save Euro.

Italy’s finance minister has called for deeper eurozone integration in the aftermath of the Greek crisis, saying a move “straight towards political union” is the only way to ensure the survival of the common currency.

Pier Carlo Padoan’s comments reflect how the tortured and dramatic negotiations that led to this month’s deal on a third bailout of Greece have triggered a round of soul-searching about the future of monetary union across European capitals.

“The exit and therefore the end of irreversibility is now an option on the table. Let’s not fool ourselves,” he said in an interview in his central Rome office.

Italy is calling for a wide set of measures — including the swift completion of banking union, the establishment of a common eurozone budget and the launch of a common unemployment insurance scheme — to reinforce the common currency. He said an elected eurozone parliament alongside the existing European Parliament and a European finance minister should also be considered.

“To have a full-fledged economic and monetary union, you need a fiscal union and you need a fiscal policy,” Mr Padoan said. “And this fiscal policy must respond to a parliament, and this parliament must be elected. Otherwise there is no accountability.”

Germany's "5 Wise Men" Argue for Grexit

In contrast to tighter integration, Germany's "5 Wise Men" say Let Debtor Nations Leave Euro.

Countries should be able to exit the euro as a “last resort” if they are unable to manage their debts, the German government’s independent economic advisers say, in a sign of Berlin’s hardening attitude towards propping up fellow members of the single currency.

The mere suggestion of a country leaving what was supposed to be an irreversible currency union had long been taboo. But Germany’s finance minister, Wolfgang Schäuble, broke it two weeks ago by suggesting a possible five-year eurozone “timeout” for Greece.

“A permanently uncooperative member state should not be able to threaten the existence of the euro,” the economists said in a special report, published on Tuesday, calling for countries to exit the eurozone if it is necessary as an “utterly last resort”.

The five-member independent panel, known as the “wise men”, also argued that creditors should be forced to shoulder losses if states go bankrupt, encouraging them to scrutinize more closely the risks before they invest.

Special Report of the Council

Here's a link to the Executive Summary, in English. The Full Text is in German only. Here are a couple of key snips from the summary.

The crisis in the euro area has revealed fundamental problems in the design of the single currency area. Firstly, there was a lack of economic and fiscal policy discipline. And secondly, there was no credible mechanism to respond to crises.

It has become evident in the past years that the euro area member countries are overwhelmingly unwilling to give up national budget autonomy. To provide a stable framework for the Monetary Union based on the principle of unity of liability and control, the German Council of Economic Experts has developed a long-term framework (“Maastricht 2.0”, see Annual Economic Report 2012
paragraphs 173ff; Annual Economic Report 2013 paragraphs 269ff.).

For the no-bailout clause to become credible, an insolvency mechanism needs to be created that requires a maturity extension of government bonds as part of future adjustment programmes if public debt is not deemed sustainable. In the event of over-indebtedness or a material breach of fiscal rules, an ESM adjustment programme should only be approved after a debt haircut is imposed on private creditors. If a member country continually fails to cooperate, the stability and very existence of Monetary Union may be at risk. A country's exit from Monetary Union must therefore be possible as a last resort.

In contrast to these reforms, short-term measures to address acute problems harbour a serious long-term threat to the stability of the euro area. This also applies to reform proposals currently under discussion, such as establishing a fiscal capacity or a European unemployment insurance. The institutional framework of the single currency area can only ensure stability if it follows the principle of unity of liability and control. Reforms that stray from this guiding principle plant the seeds of further crises and may damage the process of European integration.

Creditors vs. Club-Med Countries

The club-med countries with high unemployment seek unemployment insurance. Germany says that would "harbour a serious long-term threat to the stability of the euro area".

Germany wants tighter fiscal restraints and a "Maastricht 2.0". The club-med countries want fewer restraints and less austerity.

Germany wants to allow for eurozone exit. Italy and many other countries don't.

Inane Parliament Proposal

Like French president Francois Hollande, Padoan calls for an "elected eurozone parliament alongside the existing European Parliament ".

I mocked that idea in Hollande Pleads for Creation of Eurozone Government; United States of Europe?

Specifically, Hollande wants to eliminate "insufficiencies" (not inefficiencies) of the existing levels of government. Let's have a recap.

Counting "Insufficiencies"

• European Commission: The European Commission (EC) is the executive body of the European Union responsible for proposing legislation, implementing decisions, upholding the EU treaties and managing the day-to-day business of the EU. The Commission operates as a cabinet government, with 28 members of the Commission (informally known as "commissioners"). One of the 28 is the Commission President (currently Jean-Claude Juncker) proposed by the European Council and elected by the European Parliament. The Council then appoints the other 27 members of the Commission in agreement with the nominated President, and the 28 members as a single body are then subject to a vote of approval by the European Parliament.[Jean-Claude Juncker is president of the European Commission and a member of the European People's Party (EPP).
• Eurogroup: The Eurogroup is the recognised collective term for informal meetings of the finance ministers of the eurozone, i.e. those member states of the European Union (EU) which have adopted the euro as their official currency. The group has 19 members. It exercises political control over the currency and related aspects of the EU's monetary union such as the Stability and Growth Pact. Its current president is Dutch finance minister Jeroen Dijsselbloem. The ministers meet in camera a day before a meeting of the Economic and Financial Affairs Council (Ecofin) of the Council of the European Union. They communicate their decisions via press and document releases. This group is related to the Council of the European Union. The Eurogroup is also responsible for preparing the Euro Summit meetings and for their follow-up.
• European Union: The European Union has 28 member states. It operates through a system of supranational institutions and intergovernmental-negotiated decisions by the member states. The institutions are: the European Commission, the Council of the European Union, the European Council, the Court of Justice of the European Union, the European Central Bank, the European Court of Auditors, and the European Parliament.
• European Parliament: The European Parliament is the directly elected parliamentary institution of the European Union.
• Euro Summit: The Euro Summit (not to be confused with the EU summit) is the meeting of the heads of state or government of the member states of the eurozone (those EU states which have adopted the euro). It is distinct from the EU summit held regularly by the European Council, the meeting of all EU leaders.
• European Council: The European Council (not to be confused with the parliamentary council of Europe or the Council of the European Union) is the Institution of the European Union that comprises the heads of state or government of the member states, along with the council's own president and the president of the Commission. 
• Council of the European Union:  The Council of the European Union (not to be confused with the European Council or the Parliamentary Assembly of the Council of Europe), is sometimes just called "the Council". It is part of the essentially bicameral EU legislature (the other legislative body being the European Parliament) and represents the executive governments of the EU's member states.
• Parliamentary Assembly of the Council of Europe: PACE is not to be confused with the  European Parliament or the Assembly of the Western European Union or the Council of the European Union or the European Council or the Council. The Parliamentary Assembly of the Council of Europe (PACE) is one of the two statutory organs of the Council of Europe, an international organisation dedicated to upholding human rights, democracy and the rule of law, and which oversees the European Court of Human Rights. It is made up of 318 parliamentarians from the national parliaments of the Council of Europe's 47 member states, and generally meets four times a year for week-long plenary sessions in Strasbourg.

Growth of European Council Meetings

• Meetings of the European Council, an institution of the European Union (EU) comprising heads of state or government of EU member states, started in 1975 as tri-annual meetings.
• The number of meetings grew to minimum four per year between 1996 and 2007, and minimum six per year since 2008.
• From 2008 to 2015, an average of seven council meetings per year took place.
• Since 2008, an annual average of two special Euro summits were also organized in addition - and often in parallel - to the EU summits.

Theory vs. Practice

In theory, France and Italy want another parliament. In practice, is France prepared for what that could mean?

It could mean the end of inane work rules such as no work on Sunday. It could also mean higher retirement ages and the end of collective bargaining. Topping things off, it could mean the end of agricultural tariffs, the only way many French farms survive.

The risk for Germany is that parliament passes some inane fiscal rules or decides Sundays off is a good idea for everyone.

If countries truly understand the potential implications, neither France nor Germany would risk ceding total sovereignty to yet another parliament.

My Way

Topping off the "no deal" cake, the German constitution prohibits bailouts and transfers. France and Italy are open to transfer mechanisms, but not Finland and others.

And so here we are.

Everyone wants "deeper integration" their way. It cannot be done, and it's impossible to fix key flaws inherent in the creation of the eurozone.

Simmering Stew

Creditor-debtor issues will simmer and simmer until another boiling over point is reached.

Italy may very well be next. For details, please see Record Eurozone Borrowing: Public Debt Rises With Recovery; Greece a Small Sideshow Compared to Italy.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com