cross-border government spending would help solve the Eurozone crisis, the Bank of England’s Adam Posen said yesterday, blaming Germany’s reluctance to bail out other members for the chaos on bond markets.
The Monetary Policy Committee (MPC) member said EU authorities “should be thinking much more radically about fiscal union”.
Posen suggested establishing a “counter-cyclical” tax on real estate, creating a large fund during housing booms which can then be spent when those bubbles burst.
He believes such a policy may be particularly favoured by Germany, which did not experience a housing bubble, as it would have made countries such as Ireland pay more before the crisis.
Raising cross-border unemployment benefit payments would also be a step in the right direction, he said.
As the authorities are currently expanding their oversight of struggling governments, Posen argued they might as well take additional major steps towards fiscal union.
The American economist rejected claims that the US is a more stable economy because of labour market flexibility rather than fiscal transfers, saying this is simply a misconception about the scale of both factors.
He said Germany is to blame for the trend towards high borrowing costs in peripheral Eurozone countries, arguing that investors do not believe Germany will step in to help weaker governments after they have implemented the promised economic reforms.