Cliff Wachtel's  Instablog

In honor of Greek Bailout Week (II), here’s a proposal that should by now be obvious to all, whether they admit it or not. I’ve said it before, so have many others, most recently ECB Chief JC Trichet himself in a rare moment of candor. It bears repeating.

It’s time to decide. EZ member nations must choose between:

• The continued existence of the EZ in its current form in exchange for vastly limited sovereignty. In particular, with limited financial autonomy, with some kind of centralized budget approval and or spending veto power over individual states.
• Continued full sovereignty in exchange for a dissolved or radically altered EZ, probably one contracted down to member states with similar needs and reliable fiscal management.

The United States of Europe

The EZ’s existence in its current form but with some form of centralized budgeting or at least veto over national spending of member nations to prevent another EU crisis. Now that we know just one small nation can risk dragging down the entire EU banking system and economy (and likely risk a global contagion too), the EU cannot afford to allow individual member nations the freedom to hold the EU’s economy for ransom.

While some form of centralized budgeting or spending veto over member states definitely has its own difficulties, it would likely eliminate much of the root causes of the current crisis. In theory,

• Better chance at avoiding mismanagement/corruption/tax cheating: outsider tax collection supervisors should make it harder for connected locals to reach and corrupt those enforcing the tax laws.

A theoretically more corruption/mismanagement free mechanism might yet be able to salvage enough popular support to survive. Currently, citizens of both creditor and debtor nations can justifiably feel they’re being asked to pay for the bad decision and corruption of others.

• Better chance of political support: Pro-bailout governments are being steadily rejected by voters, and for good reason. Taxpayers are bearing the risks, while private investors keep the profits. Debtor and creditor nation citizens are being asked to bear hardship for the mistakes of others, for the sake of banks, bankers, and connected fat cat locals who benefitted from lax tax enforcement, easy credit, or bankers who sought bigger bonuses and profits from risky PIIGS bonds and now want others to pay for their mistakes. Sooner or later voters will rightfully reject those supporting this arrangement. That’s already at least been attempted in Ireland and Portugal, and on a local level in other nations like Germany.

Understood this is not a comprehensive solution.

Taken only slightly further, and this line of thinking leads us to an idea I first read about ~30 years ago in The New Republic, perhaps written by then Editor In Chief Martin Peretz, in the wake of the 1980s Latin American Debt Crisis (remember that one?) Simply put, that banks, like utilities or any institution whose failure can wreak social or economic havoc, cannot be allowed the autonomy to fail.

The Lehman Brothers collapse was what started the first contagion and ongoing Great Financial Crisis, and no amount of centralized sovereign budgeting would have prevented that.

Hence the need for greater regulation in exchange for government support against insolvency. Not easy, but also clearly unavoidable if future financial crisis are to be prevented and ultimately the value of fiat currencies maintained. (They get undermined by money printing/stimulus of big bailouts).

Hey, I’ve always thought of myself as highly in favor of free enterprise, limited government, etc, but first and foremost I’m a pragmatist. I see no way out of the above.

Do you dear reader? Input welcome.

This is one of those posts in which I’m looking at an economic policy dilemma and asking for solutions rather than advocating a specific answer.

Thanks in advance for your thoughts.

DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING DECISIONS LIES SOLELY WITH THE READER. IF WE REALLY KNEW WHAT WOULD HAPPEN, WE WOULDN’T BE TELLING YOU FOR FREE, NOW WOULD WE?