What fiscal union and joint euro bond entail

I have been saying that the design of the Euro is flawed. I suppose many of other people have been saying that the solutions would either be a breakup (or put it more mildly, losing one or more countries in the Eurozone) or a fiscal union.

While Chancellor Angela Merkel emphatically refused considering about that, the so-called Euro bond has been cited as the “solution”. The attraction of it for the periphery is that this appears to lower there financing costs if the bond if issued collectively by the Eurozone countries, although Germany does not really support the idea because it would appear to raise Germany’s costs of borrowing.

But that’s hardly the main point, in my view.

Either the joint euro bond is a step forward the fiscal union, or, as Mario Draghi, the head of the European Central Bank, suggested, you cannot have Euro bond before you have fiscal union. Whichever comes first, it is important to understand what fiscal union with joint bond issuance entail.

The Euro is flawed because it does not have fiscal union, as many have said. But if it has, I have explained what would happen previously. Essentially, the country which has trade deficit with the rest of the monetary and fiscal union will be running budget deficit as well, while the rest of the monetary and fiscal union will be running trade and budget surplus, assuming that the monetary and fiscal union as a whole is a closed economy. Because there is a fiscal union, the parts of the union with surpluses have to subsidise the country with deficit so that these deficit countries can continue to run the trade deficit (i.e. import stuff from surplus countries).

In other words, those government with surpluses will have to give the money away in order to sustain their surplus and others’ deficit, and it has to continue to do so forever, or else the economies of both surplus and deficit countries will contract. Ask Germany if they would like to see this happening, and I doubt if they would say “yes”.

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About Zarathustra

Zarathustra: Founder and Managing Editor of Also sprach Analyst. Once an analyst, now an investor and entrepreneur. Based in Hong Kong, but Londoner at heart.