As the Greek saga continues, can only fiscal integration secure the Eurozone’s future?

The threat of a Grexit rumbles on (Source: Getty)

Lydia Prieg, a PhD student at the University of Cambridge, says Yes

Greater fiscal union is the only sustainable solution for the Eurozone. Without coordinated redistribution, some countries are enjoying artificially low exchange and interest rates. This boosts exports and growth. Other countries have inappropriately high exchange and interest rates, which hinder exports and growth.

In the build-up to the crisis, German banks were also lending money to the Greeks, and these funds were often used to buy German exports. Germany has thus profited for years from lower rates without having to compensate the weaker economies that struggle at such levels.

We must stop blaming southern countries for irresponsible lending and structural problems within the bloc. The US is an example of a coordinated union where states still predominantly set their own tax policies. The Eurozone must strategically redistribute some tax proceeds between countries, or disband the monetary union. Anything else is just kicking the can down the road.

Christian Schulz, senior economist at Berenberg, says No

Classic elements of fiscal union such as common debt issuance, debt mutualisation or even unconditional fiscal transfers from rich countries to the poor would be dangerous for the Eurozone. The spreads between the borrowing costs of the most vulnerable and the most stable member states are important incentives for fiscal discipline and wider structural reform efforts. Where such spreads are absent or where tax revenues are transferred unconditionally, as in Germany’s inter-state fiscal equilibrating system, economic imbalances tend to be aggravated – not resolved over time.

In Bremen, a net recipient of aid from rich Bavaria and others for decades, Germany has its own little Greece: reform-resistant with sluggish growth and enormous public debt. Germany sets some good examples for the Eurozone, but fiscal union is not one of them. At the margin, the Eurozone could review its fiscal rules, clarifying special circumstances and tightening penalties.

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