Last night saw a massive bailout of the eurozone’s fringe in order to alleviate the pressure on the PIIGS states, which have seen sovereign debt levels rocket and their ability to lend diminished.
This bailout is being construed as a one time deal set to re-balance the European economy and protect the eurozone, but it is actually the first step in a program that will see the eurozone become a more federal union with a single treasury and federal tax policy.
It’s inevitable really. How could the eurozone, an area with economies as disparate as the United States, maintain a currency union without the balancing effects of centralized treasury?
Like the United States prior to revolution and under the Articles of Confederation, the eurozone exists within the context of a weak, decentralized government. Policies of taxation and budgets are primarily controlled at state level. But other key issues, like price stability and inflation, are controlled by the European Central Bank. There is therefore a divergence of interests that needs to be rectified.
Bailing out its fringe repeatedly is not a long-term solution to this problem. Forming a eurozone treasury, which can issue its own debt to support the area and manage the budgets of its member states, is.
Merkel has already called for the focus to move to the “root of the problem,” meaning consolidating member state budgets.
Slowly but surely more power from states will shift to the European Central Bank and European Union from its member states.
In the future, states admitted to the eurozone will need to jump through more hoops, and sacrifice more sovereignty, to gain approval. But the fiscal union will be stronger, its growth more controlled, and its stability more assured.
Like California and New York, the powerhouses of the U.S. economy, Germany and France will be expected to provide tax-driven support to the fringe states. They’re citizens will just have to get used to it.
And when the sovereign debt crisis comes home to America, expect states to have to sacrifice more political independence for their bailouts, as the U.S. federal government becomes even stronger.
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