(Editor’s Note: This is a response to a comment posed in the post titled “How Will Europe Solve its Financial Crisis? Early Damage to U.S. Markets and Corporations“)
Professor, it is my pleasure to respond to your inquiry. I do strongly believe there is a need for pan-European credit and there are different reasons in support of my statement.
Firstly, it is too late to think about the accountability of each state of the European community. The argument for accountability and even financial stability or fiscal solvency (of European member states) would have been more relevant in 1993 when the European community was first created. Indeed, before allowing a country into the European Union, there should have been greater scrutiny with respect to each state’s financial health and credibility. Such an assessment might have foreshadowed the susceptibility of particular states to the type of insolvency problems member states are now facing.
Secondly, Spain and Italy are “facing economic situation[s] of extreme difficulty”: yields have dropped sharply, and this is a consequence of the fact that Italian and Spanish banks, financed by the European Central Bank, been buying their own “higher yielding government bonds” for a long time.
This is a clear example of the fact that the ECB has been infusing money into European Banks, precisely 1 trillion euro in December and February, and the ECB continues to defend the climb in yields as a momentary consequence of the extended loans, which surely lends support to bank balance sheets. However, this did not solve the debt crisis in the euro-zone.
It appears this is just a loophole of the treaty article that forbids the ECB to help countries financially. Consequently, “there is a need to renegotiate the treaties to stabilize the situation.” As I have previously argued, the change in the treaty should create a unified financial system, which would offset the debts of more insolvent countries with financially solvent countries. This would thereby institute a significant change to the EU economic system, abolishing the State sovereignty, which has long stood as an obstacle to a centralized financial structure and lead to the consequences, affecting the global economy.
In the end, it seems clear to me that the only workable solution is the creation of pan-European credit and a short-term concern with solving the crisis should not focus on individual country accountability. Indeed, the ECB has been financing the Central banks of European countries since the beginning of the crisis, thereby already undermining accountability under the current regime. To be sure, in the long run, a union that stresses individual accountability for their fiscal policy, should be the primary consideration to avoid future catastrophes.