ECB president Trichet suggested today that European governments should set-up a finance ministry for the 17 nations in their currency union. It makes perfect sense that if you have a single currency then you should have a more unified fiscal environment. One of the key problems with the current Euro crisis s that monetary unification has not matched unification on the fiscal and banking areas. This type of unified structure would be something more closely resembling a federal system like the US with both local and broader tax authority. Trichet did not go so far as to advocate a federal system but he suggested that a finance ministry would have three functions:
1. surveillance of fiscal and competitiveness policies
2. executive functions with respect to integration of the financial sector
3. the representation of the union with international financial institutions
On all three points, there is a loss of sovereignty. This proposal is unlikely to gain support from either deficit or surplus union countries; nevertheless, it is the plan that makes the most sense to resolve fiscal crises no occurring at the state level.
There has to be better oversight on the budgets of all countries. Most EMU countries have running budget deficits higher than expected by the Maastricht Agreement. There also has to be an integrated approach to bank management and the ability to rise above the self-interest of individual countries.
Still, making major policy changes at critical times is never good. It calls for further integration at the very time that the monetary union has the potential to break apart. This may be the right time to double down on union. Certainly something is needed to change the current system, but further integration may not be the will of the people even though it is a solution to solve the short-run problem of crisis management.
There has to be better oversight on the budgets of all countries. Most EMU countries have running budget deficits higher than expected by the Maastricht Agreement. There also has to be an integrated approach to bank management and the ability to rise above the self-interest of individual countries.
Still, making major policy changes at critical times is never good. It calls for further integration at the very time that the monetary union has the potential to break apart. This may be the right time to double down on union. Certainly something is needed to change the current system, but further integration may not be the will of the people even though it is a solution to solve the short-run problem of crisis management.
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