Photo: Abby Batchelder/Flickr
Europe is headed for a minimal fiscal union after a Greek exit appears all the more likely, Citi Chief Economist Willem Buiter writes in a FT op-ed today.His reasoning: countries will not lend much needed capital to Italy or Spain if it looks like crisis-hit countries can receive unlimited funding without abiding by spending targets set by the troika, the group helmed by the European Commission, ECB and IMF.
That appears to be the case with Greece, particularly after earlier today Reuters reported that the new Greek government would seek a two-year extension on meeting fiscal targets.
Buiter believes this will trigger the troika to issue a declaration that Greece is “wilfully non-compliant” later this year, ending disbursements to the Greek state.
And that will force Greece to abandon the euro in favour of its own currency.
What will be left is a weak banking union far less powerful than the original fiscal pact imagined.
Minimal fiscal Europe will consist of a larger European Stability Mechanism, the permanent liquidity fund, and a sovereign debt restructuring mechanism (SDRM). The ESM will be given eligible counterparty status for repurchase agreements with the eurosystem, subject to joint and several guarantees by the euro area member states. There will be some ex-post mutualisation of sovereign debt. Sovereign debt restructuring through the SDRM will recur.
Banking union aims to sever the poisonous umbilical cord between sovereigns and the banks in their jurisdictions. A roadmap to banking union will likely be announced at the EU summit on June 28-29. It better be a credible path. In any case, implementation is the hard part, and time is of the essence.