The point at which euro-zone leaders said, „From here on in, we’re in the same boat with them“, was back when the euro zone was created. That boat has sailed.
What has happened now is that Europeans have been confronted with the impact of their previous decision to all hop in the same boat. If citizens of core economies are unhappy with the idea of indefinitely sharing a boat with the Greeks and Italians, then what they’re opting for is not simply the choice to avoid issuance of a eurobond, it’s an end to the euro zone.
In my understanding, there are many ways in between.
First, you are not entirely „in the same boat“ with someone just because you share a currency. The Euro is something like the gold standard, just more flexible because you have a central bank printing „gold“.
Second, because you have this central bank, there are ways in which it can use its power to make a diverse monetary union work better. My recent proposal may be unworkable, but I think there are many ways to do it (I will write about some in the future). The simple choice between fiscal union and the end of the Euro simply lacks creativity.
Third, let us ignore the banking issue for the sake of argument. Then what? Nothing on earth would prevent the Eurozone from existing in its current form if Greece asked its creditors (with the help of the IMF) for a proper debt restructuring. And why should a banking problem change the basic mechnisms of a currency union? When the Euro was created, most European politicians and economists did not take the implications for financial institutions into account, at least not adequately. But then a radical European banking resolution regime is the answer (from efficiency and equity perspectives, and almost every other perspective, too), not a fiscal union or the end of the Euro.
Finally, fiscal union is a very broad term with as many building blocs as there are economics bloggers. But fiscal policy in a more narrow sense simply cannot help much if large boom and bust cycles have led to structural problems of the kind we see in Spain and Ireland. Neither can fiscal policy help much if an economy has become uncompetitive and has to readjust, like Germany did in the first decade of the Euro and like Greece and Portugal, and probably others have to do now. Fiscal policy might be useful to help smooth these processes, and here is a problem without doubt. But fiscal union is not the only answer. Another answer is to keep overall debt levels so low (e.g. at 60%?!) and banking regulation so tight, that a fiscal policy response to purely cyclical shocks is still possible and the need for huge rescue packages for banks unlikely. Moreover, a monetary policy with a higher inflation target would be very helpful.
I agree that fiscal union or Eurobonds would „solve“ the current crisis – although the political implications of this are much more complicated (and potentially nastier) than proponents admit. After all, strategic default also works, probably even better, on official money as we have just witnessed. The distributional consequences of this „solution“, however, are highly unfair: in essence, we are bailing out banks and investors who thought the former „red-light district of the financial world“ (Hugh Hendry) would turn bright just because you pay in Euro. I never understood how anyone on the left (!) could be in favor of this, especially since the European banking sector seems to be much better prepared to take losses than their lobbyists have successfully made the public believe.
What we need for the future, then, is creativity in designing a diverse monetary union that goes beyond simple fiscal rules that proved insufficient. But we should think twice before we risk the core idea of Europe, the friendship between its countries, in a politically messy fiscal union by co-signing loans (HT Tyler Cowen).
PS: My holiday is not well timed, so much to read and write about…