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The EU Fiscal Crisis: Forcing Eurozone Political Union?

Monday, 17 January 2011 16:00

By Graham Bishop

"In this important book, Graham Bishop sets out many of the key challenges and choices facing policy makers as we move towards a system of European economic governance. It provides a valuable and thought-provoking contribution to one of the most important debates on public policy in Europe today." Jerzy Buzek, President of the European Parliament

 



Published: January 2011
ISBN: 978-1-907720-14-7
106pp, paperback

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Description


The end of the euro would be the end of Europe – only tough collective action from eurozone leaders can prevent financial meltdown. But do political leaders fully realise the enormous scale of what is required and the frightening consequence of failure, and that intense financial and economic pressures are forcing far-reaching political changes in the eurozone? This searching and timely new study examines the driving forces and potential outcomes of the eurozone debt crisis.

The eurozone debt crisis looks likely to take a dramatic turn for the worse – raising the intensity of the search for enduring solutions as the markets now price six states as ‘risky’.

The eurozone leaders have collectively affirmed “that they stand ready to do whatever is required to ensure the stability of the euro area as a whole. The euro is and will remain a central part of European integration.” Chancellor Merkel of Germany and President Sarkozy of France also sent New Year messages to their citizens that cast the issue in terms that were both stark and historic. It is increasingly clear that the eurozone will take tough collective action on the economic governance of its members. However, in The EU Fiscal Crisis: Forcing Eurozone Political Union in 2011?, Graham Bishop – a leading technical analyst of economic and structural developments in the financial markets of Europe – argues that the eurozone leaders have yet to truly grasp the huge challenges they face and the implications of failure. Furthermore, intense pressures from the interactions of financial markets, economics and politics are forcing the creation of a genuine eurozone political union.

The eurozone now faces several options for its future actions. Three scenarios are considered: an inflationary debt spiral; default; or the emergence of a collectively strong, federal eurozone. Graham convincingly argues that the visionary approach of the latter option is the only way forward for Europe.  In this scenario, the eurozone will have emerged from the financial crisis as a political federation – loose in some respects, but with tightly centralised economic governance at its heart. The proven commitment to fiscal probity may even make it attractive relative to alternative investments around the world. The conclusion is that, if the eurozone does indeed do “whatever is required”, then it will survive.


Contents



Preface

Introduction
Overview
Forcing eurozone political union: the EU financial crisis

Part I: The development of the single market in financial services in 2010 and the direction for 2011

Introduction
Financial regulation: completing the reform
The single market for capital and financial services
SEPA (Single Euro Payments Area)
Consumer protection
Accounting standards
The G20 and reform of financial regulations: the role of the EU
Declaration of the Summit on Financial Markets and the World Economy
Financial sector reforms
Conclusions on the impact of the single market

Part II: Integrating European economic governance: crisis as the driver in 2010 to providing a stronger structure in 2011

Background
The political response to the current crisis
Implementing the de Larosière proposals for supervisory reform: ensnared in both a constitutional and fiscal crisis?
May–October 2010: the European fiscal crisis erupts
Economic co-ordination
October–December 2010: the fiscal crisis deepens – becoming overtly a eurozone issue
Issues for holders of government bonds
Political evolution or revolution: collective decisions by the eurozone?
After the December 17 Summit: still waiting for the real decisions
Statement by the Heads of State or Government of the euro area and the EU institutions


Part III: Why financial integration will force political integration in 2011 and later

European government bonds in 2011
Economic governance of the eurozone
Proposal for a Regulation on enforcement measures to correct excessive macroeconomic imbalances in the Euro Area
A Regulation on enforcement measures to correct excessive macroeconomic imbalances in the Euro Area
How to make sanctions effective
Proposed Regulation amendments
The Role of the European Systemic Risk Board (ESRB)
European Financial Stability Fund (EFSF)
Moody’s rating rationale
Timetable for first half of 2011
Three scenarios for the future of the eurozone
Scenario I: inflationary debt spiral
Scenario II: default
Scenario III: a collectively strong, federal ‘Eurozone’ emerges

Appendix I: Market Discipline on Eurozone Public Debt – amend SGP Regulation and CRD IV

Appendix II: The Graham Bishop papers

Reviews


"In this important book, Graham Bishop sets out many of the key challenges and choices facing policy makers as we move towards a system of European economic governance. It provides a valuable and thought-provoking contribution to one of the most important debates on public policy in Europe today." Jerzy Buzek, President of the European Parliament

“Graham Bishop explains why failure of the Euro is not an option and why repairing flaws in a currency that serves 330 million people requires bold steps. Essential reading for Eurozone Finance Ministers!”
Sharon Bowles MEP – Chair of the Economic and Monetary Affairs Committee of the European Parliament

'Many British commentators make assertions about the Eurozone. Graham Bishop, by contrast, brings to the subject economic expertise, rigorous analysis and political insight. His book should bring the issue roaring back to the front burner of British policy making."
Sir Stephen Wall (UK Permanent Representative to the EU 1995/2000 and EU adviser to the Prime Minister 2000/04)

“The reaction of the EU heads of government to the euro crisis has been late, short term and inadequate. What is needed is a clear-headed convergence plan that installs proper EU economic government. Graham Bishop brings his great experience of EMU to plot the way forward and finds solutions which are financially stabilising and democratically acceptable." Andrew Duff MEP – Constitutional Affairs spokesman, ALDE

“Europe’s leaders are still thrashing about looking for a solution to the euro crisis. But Graham Bishop’s careful analysis points out that their response has already taken them quite a long way down the road to greater political integration. They must now recognise that reality and move decisively. ” Peter Sutherland, European Commissioner 1985/89, former Director General of GATT and Chairman of Goldman Sachs International

"I welcome Graham Bishop's book and his proposals. We should use the crisis as a chance to do what is necessary to advance Europe's position in the global arena. If we want to be seen as a player in the world that counts we have to deepen integration and make sure that the Euro as the most important political project succeeds. Europe is at a critical crossroad: not moving ahead means regression, not defending the status quo." Dr. Wolf Klinz, MEP -  Chairman of the Special Committee on the Financial, Economic and Social Crisis (CRIS) of the European Parliament

Author



Graham Bishop graduated from Sheffield University in 1972 with a degree in Jurisprudence. His publications, articles and speeches on the deregulation of Europe's financial markets provide an informed commentary from the practical perspective of a market participant, but with a political grounding.  

His City career encompasses Phillips & Drew, S G Warburg, and Salomon Brothers/Citigroup.  He founded GrahamBishop.com in 2000 to bring directly to his clients the insights that flow from his standing as a leading technical analyst of economic and structural developments in the financial markets of Europe, providing an informed commentary from the practical perspective of a market participant, but with a political grounding. He has worked extensively with both European and UK political authorities, including the European Commission, where he was a member of the Consultative Group on the Impact of the Euro on Capital Markets (the Giovaninni Group). He was also a member of the Commission's Strategy Group on Financial Services (1998 – creating the Financial Services Action Plan) and the Committee of Independent Experts on the preparation of the changeover to the single currency (1994–95). He was nominated by the European Parliament to be one of its two members of the first Inter-Institutional Monitoring Group, and was Rapporteur for the spring 2003 and November 2004 Reports. He was elected to the Board of the Kangaroo Group in November, 2005 and re-elected in 2007 and 2009.

In the UK’s House of Commons, Mr Bishop was a Special Advisor to the Treasury Select Committee in its examination in 2003 of the implications for United Kingdom membership of the Single Currency. He advised the Treasury Committee on the corresponding reports in 1998 and 1996. He was also a Specialist Adviser to the House of Lords Select Committee on the European Union in its 2003 inquiry into The Barriers to Competition in the Internal Market for Financial Services. He is a Council Member of the Federal Trust and a member of the European League for Economic Co-operation (ELEC). He frequently participates in studies and meetings of research institutes such as Centre for the Study of Financial Innovation (CSFI).

For more information, visit grahambishop.com; keep up to date with Graham Bishop’s news and views: register free for his weekly Headliner”

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