As fears about European governments’ debt grow, Europe’s lack of a true fiscal union is causing these uncertainties to linger.
The 17-member euro zone has unified monetary policies and given the control of the single currency to the ECB. However member states have continued to pursue their own budgetary policies. National treasuries have kept on borrowing by issuing bonds.
So far the only fiscal criteria, set in the 1991 Maastricht treaty, suggests any member state’s debt should not go over 60 percent and the budget deficit over three percent of their GDP.
With the global financial crisis these debts surged over this level in most of the member states: not only the peripheral countries but also the core economies are suffering from huge debt burdens.
To ensure fiscal discipline discussions are focusing on setting up an economic entity to monitor economic coherence in Europe.
Increasing the power of the emergency European Financial Stability Fund in July was considered to be a step towards a single European economic ministry. However, disputes between the leaders make this almost impossible for now.
The debt-laden countries, especially Italy, are pressing for the launch of a single euro bond which will pool all European debt. This should ensure the soaring borrowing costs of struggling economies will decline. But at the same time the cost for Germany will increase.
For this reason Berlin strictly rules out the option of a single eurobond without setting up an efficient mechanism that imposes fiscal discipline on member states. The Germans fear that peripheral states will continue spending and increase their deficits.
In any case all governments are reluctant to hand over their control of national budgets, so the situation is deadlocked.
Overall efforts towards European economic governance remain limited to increasing the coordination between member states and trying to adopt a coherent approach to calm the markets.
But any effort that does not address the core problem, which is the debt burden on troubled economies, will not be enough to reduce the anxiety in the markets about the future of the euro and monetary union.