The European Central Bank can actually solve the governance problems that got Europeans into this mess virtually immediately and without treaty change, Geneva-based economist Charles Wyplosz writes in a column out this morning on Wall Street Pit.In fact, the whole idea that EU states will have to cede fiscal sovereignty through a new treaty is overrated, he argues, because the central bank could not only bypass this but do it better.
The proposal that some central EU authority would step in to usurp sovereignty from a nation when its finances get out of control is “extraordinarily intrusive,” and so “the treaty route [to address fiscal discipline] is unlikely to lead anywhere.”
Instead, Wyplosz’s scheme goes like this:
A much better arrangement is possible without a new treaty. Currently, in its routine refinancing operation, the ECB accepts as collateral a wide range of assets. Most central banks accept only – or mainly – treasury bonds. The unusual arrangement of the Eurozone is an artifact of history – because practices differed considerably among future Eurozone countries, the ECB decided to accept every asset that was previously accepted. The ECB has the authority to decide what collateral it accepts and it could decide to only accept treasury bonds issued by governments that exercise fiscal discipline. It would work as follows.
The ECB would ask an independent body to examine the fiscal policy framework of each member country. The body, call it the Fiscal Discipline Board, would look for arrangements that adequately constrain member governments, for example the German debt brake or the Dutch coalition agreements. The ECB would bind itself to follow the Board’s judgment. A country that has not adopted arrangements deemed adequate, or that does not abide by its own arrangements, would face the consequences: high borrowing costs, possibly loss of market access. The presumption is that the situation would be promptly corrected.
Read his full column here.