Two weeks ago I wrote an article entitled “The Eurozone will need to adopt a ‘super-sovereign’ approach or risk dissolution”. This morning the leading German newspaper, Der Spiegel, and the Wall Street Journal reported that Eurozone leaders are increasingly moving towards ‘a closer union’. A closer union will have to be, by necessity, a very close union akin to a ‘United States of Europe’. There is a growing consensus that the Eurozone will have to, at the very least, attempt a federal/super-sovereign approach. This begs the question: Can the Eurozone come together with a common fiscal policy and taxing authority? Here is a list of daunting challenges/obstacles which stand in the way of a Eurozone super-sovereign:
- Creating a Eurozone taxing authority with enforcement/police powers
- Creating a centralized fiscal policy authority which has the power to oversee each Eurozone member's finances and enforce fiscal policy
- Formulating a Eurozone tax code which would require uniform application and enforcement throughout the entire Eurozone for both individuals and corporations
- Formulating a method to apportion the proceeds of Eurobond offerings to each Eurozone Member State
There are certainly many more challenges/obstacles which I did not mention, however the list above outlines the major issues facing Eurozone leaders as they begin to delve into the Eurozone super-sovereign project. Moreover, certain Eurozone periphery nations have a long history of tax evasion which has almost elevated the activity to national pastime status. How will a Eurozone Treasury enforce tax laws and punish tax evaders in countries where tax evasion is ingrained in the culture? Also, the new code will have to be enforced uniformly throughout the Eurozone; currently each Eurozone Member State has widely varying tax codes and rules. This will be a monumental undertaking which will take at least a year to develop and pass into law.
In the meantime, Spain will require at least 635 billion euros over the next few years (340 billion in 2011) to cover its deficits and meet bond repayments, Portugal will need to raise 51 billion euros in 2011 alone to cover its deficit and meet bond repayments, and I could go on. Will the ECB be able and willing to provide cover fire while Eurozone leaders attempt the most complex undertaking in the history of governments/monetary unions? To quote Scott Minerd of Guggenheim Partners: “There’s nothing that cannot be sacrificed if the entire financial system is at risk. Practically, I believe this means that the euro will head to parity with the dollar and then ultimately below parity;" therefore, get ready for massive debt monetization in the Eurozone (Long gold/short euro terms make a lot of sense if this were to occur).
Disclosure: I am long gold (bullion and GLD) and I have sold bull put spreads on GLD, I am also short EUR/USD and EUR/CHF. .
