I feel like I’m missing something. Many people are obsessing over the latest Eurozone summit, but as far as I can tell Sarkozy and Merkel have proposed nothing that would make the slightest difference to the Eurozone’s immediate problems.
The Sarkozy-Merkel plan is a confidence trick (albeit with a few growth-destroying tax measures thrown in for good measure). It is nothing more than a grand political gesture designed to fool people into thinking that Eurozone governments are really serious about running balanced budgets in the future, and therefore ought to be lent money now at low rates.
Perhaps a fully-fledged fiscal union in Europe, with large scale redistribution from some regions to others, would put off that day of reckoning for a while – but only at the cost of locking the healthier economies into the same fatal spiral as the peripheral countries. How long would it be before it became clear that governments weren’t actually going to reduce spending? Or that higher taxes wouldn’t necessarily deliver more revenue? Or that these economies were so weighed down by debt, so distorted by unsustainably cheap credit, and so tied up in red tape that there was no growth coming any time soon? Call me a pessimist, but I don’t think it would take long.
Adam Smith Institute