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Response to Merkozy fiscal union: "Something radical is needed"

France and Germany may have thrashed out a new set of fiscal rules to save the Euro but the markets are not happy.

France and Germany may have agreed on new fiscal rules, in a "comprehensive agreement," in order to tackle eurozone issues and save the Euro - but the markets are not happy.

News that a potential downgrade from S&P of six AAA countries around Europe, haven't helped either.

When Simon Smith, chief economist at FxPro spoke to Euromoney, he didn't mince his words (emphasis is ours):

The simple truth is that it’s not fiscal union, in whole or in part.

And it’s either this, or a partial break-up, which are the ultimate exit routes from the current crisis, something which I’ve advocated for a long time now.

Something radical is needed, which breaks from the past, but what was presented was essentially a tweaking of the broken regime of debt/deficits limits and fines for debt and deficits, which proved to be unworkable.

There’s no logical economic reason why a country with a deficit of 3.1% should be fined and one with 2.9% not.

This arbitrary level takes no account of a country’s ability to service and pay back the debt resulting from running such a deficit

Smith also highlighted the technical issues following the "fiscal union."

I also feel that it’s absurd to believe that you can successfully impose a system of fines on a sovereign basis.

People can be fined, but not countries. What’s the stick? Pay up or leave the euro?

That won’t be on the table because that would then leave countries open to speculative attacks.

In sum, fiscal union requires a degree of centralised taxation, spending and political decision-making; that’s the bottom line.

Sarkozy and Merkel’s proposal falls short of this, which sets it up for failure.

- Euromoney Skew Blog

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