Germany famously austere and harsh Finance Minister Wolfgang Schäuble is the subject of a Der Spiegel interview in which he defends the Euro and Germany’s motives in acting the way it has.There are some funny, eye-rolly parts, such as…
SPIEGEL:You want nothing less than a United States of Europe.
Schäuble: Even though the term is used repeatedly, it doesn’t make it any better. No, the Europe of the future will not be a federal state based on the model of the United States of America or the Federal Republic of Germany. It will have its own structure. It’s an extremely exciting venture.
But there is one nugget in there that everyone must by now understand, and that is the conditions that must exist for Germany to support the kind of fiscal burden sharing that will be required to end the euro crisis.
SPIEGEL: What would a fiscal union have to look like so that Germany could accept euro bonds?
Schäuble: In an optimal scenario, there would be a European finance minister, who would have a veto against national budgets and would have to approve levels of new borrowing. It would be up the individual countries to decide how to spend the approved funds, that is, how to answer the question: “Should we spend more money on families or on road construction?”
This is the clearest articulation yet of the German stance. If you want German money, then a European finance minister must be allowed to veto your spending. Don’t like it? Then figure out a way to backstop yourself?
Could Europe ever get to this point?
Well the fact of the matter is that it’s not that different from what George Soros is proposing… an idea that got a lot of buzz today.
Soros proposing not a finance minister that can veto budgets, but rather a debt redemption fund that backstops government finances and penalizes those countries that aren’t undertaking agreed-upon reform.
The different is not that enormous as both essentially involve a backstop for some lack of sovereignty. Soros’ vision is a bit less harsh, though even he envisions a full joint Eurobond scheme eventually.
Meanwhile, the FT is reporting that at this week’s summit a scheme is being devised that moves the ball along these lines… a plan whereby the EU could rewrite national budgets. The draft report will also be presented as part of a fiscal and political union.
Bottom line: The various ideas aren’t wildly far apart, and some discussion in this direction is happening.
The signal we’re looking for next is not from the Germans, but from the leadership of Spain/Italy/France that this kind of trade appeals to them, that they’d be willing to give up more fiscal sovereignty in exchange for backstops.
One more thing: It’s true that any scheme like this would be a long way off, and it feels as though the speed would be too slow to prevent an acute crisis. But if the market starts to expect that debts will be backstopped, that will help. Combine that with the ECB doing whatever it takes to keep the banking system alive (such as this week’s latest move to expand eligible collateral) and a medium-term muddle along path exists.