Former Italian prime minister Romano Prodi says Europe must centralize authority in order to save the Euro. If you’ve been following the roller coast ride of the past couple days on the equity, bond and FX markets, it’s hard to disagree.
When the euro was born everyone knew that sooner or later a crisis would occur. It was inevitable that, for a such a bold and unprecedented project, in some countries (even the most virtuous ones), mistakes would be made and unforeseeable events occur. It was also clear that the stability and growth pact was – as I have said before – “stupid”, not because it was mistaken in its objectives, but because it was founded on purely mathematical parameters without any discretionary powers or political instruments to enforce it. Germany and France were the first countries to violate it, although not in a destabilising way: their finance ministers decided to ignore the objections of the European Commission (possibly because they were “too big to fail”)…
I pushed hard to get Italy into the eurozone to give my country the discipline it needed [oops...] to end the string of currency devaluations that had left its economy fragile and undermined its public finances, despite the existence of a strong manufacturing sector.
I therefore consider the recent decisions made in Brussels as a very important step towards the gradual creation of a European fiscal federalism. Combining the resources of the eurozone countries and the Commission with those of the European Central Bank is a step beyond the stability and growth pact. In fact, creating bodies capable of preventative action and successful intervention would imply that the pact has been replaced by a more muscular co-ordination.