Poland’s Vision for the Euro

Radek Sikorkski’s speech in Berlin on European integration yesterday was too good to go unmentioned, even though it has already been picked over by newspapers as good as The Economist and the Financial Times. The Polish Foreign Minister is erudite and has a sound grasp of history, but it is the content of the speech, as much as it’s jokes and examples that makes it compelling.

The thrust of the argument is that the model on which the EU is based is flawed. It is singularly ambitious, but lacks the raw instruments of power. In place of the current hotch potch, the EU should be able to review national budgets and sanction governments that break the rules in a way that threatens growth. The Commission would be hacked back, to make policy making more effective, the Parliament fixed in one location to increase accountability and a large amount of discretion reserved for individual treasuries to maintain sovereignty over the means of growth.

That said, the move would entail a huge loss of sovereignty and could take years to execute. That does not make it worthless, but since the EU’s baby steps have failed to remove it from the rapidly approaching danger, it is an interesting signpost that will be acceptable to smaller countries because it is within the framework of the EU (though the Polish opposition have already called it more or less treasonous) and to Germany so long as it is robust.

The urgency within the EU is, or rather should be, increasing day by day. The latest piece of bad news is that Germany has now outstripped Italy and France in the market for credit default swaps, while borrowing on the back of national bonds has been affected by low take up (Germany) and high rates of interest (Italy). Credit default swaps are relatively new, poorly understood and even more badly regulated – they may not cause defaults, save in extreme cases such as when insurers go bust on the back of huge market shifts (AIG), but they increase the attractiveness of a default to unpatriotic fund managers (of the kind in this BBC video) and are dangerous for those entities being speculated on because:

a) They appear safer than useful creditors, such as industry or national governments;
b) They reward investors for spotting over-extended creditors, rather than growth areas; and
c) They can become a self-fulfilling prophecy.

As such, Europe would be well advised to understand, and most likely crack down on these financial instruments (as Nicholas Sarkozy has proposed and Angela Merkel appears to be considering – in the case of naked shorting only). This will not be popular and may limit the Eurozone’s ability to finance itself, as fund managers will not be able to hedge their bets. Hence the need for a new, credible financial instrument, the Eurobond while institutional reform gets off the ground.

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