Following weekend news that around €100 billion has left Spain in the first three months of this year, Spain called for a new eurozone authority which would co-ordinate national budgets and manage the EU bloc's debts, according to the Financial Times on Monday.
According to Mariano Rajoy, the prime minister, this would send a clear signal that the euro project is irreversible. He said he has reason to believe there will be early progress in this regard, according to Dow Jones Newswire as reported by MarketWatch.
"The European Union needs to reinforce its architecture," Mr Rajoy said. "This entails moving towards more integration, transferring more sovereignty, especially in the fiscal field....And this means a compromise to create a new European fiscal authority which would guide the fiscal policy in the eurozone, harmonize the fiscal policy of member states and enable a centralized control of (public) finances."
This statement is likely to be of historic significance as it comes from a prime minister of a major EU country which is seeking assistance from the other countries in the bloc, offering a quid pro quo involving sovereignty over fiscal matters. It is also interesting in how this pragmatic stance differs considerably from the main voices coming out of Greece.
We see this creeping federalism as an inescapable and natural evolution of financial arrangements in the EU if the bloc is to stay bound by one currency.
The current bad situation may provide long-term investors with a European buying list with a good opportunity to take the first steps.
The EU's weaknesses are currently in focus: First, the high indebtedness of the different members; second, the lack of a common treasury supporting the euro. These two factors have pushed the euro towards the lows of these last eight years.
If the plans for federalism and a common treasury take hold, this will help attenuate the second problem as well as add to the EU's capacity to deal with its debts. Compared to the U.S. situation - currently also tainted by huge debts, fiscal imbalances, and political intransigence hardened by the impending Presidential election - the EU might soon not look so bad, and the focus of international finance might again be the state of U.S. finances. The euro, in this scenario, might strengthen considerably.
European stocks bought under the current pressures may rise in value as the bad news subsides and the euro strengthens. Investors with international portfolios may therefore wish to take advantage of the dollar's current strength compared to the euro.
This propensity towards federalism, in much the same way as happened in the early days of the USA when the states got into financial difficulties, was the subject of this earlier post in this blog ("Greece Exits. Then What?".
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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