The important development in Euroland yesterday was a speech by Polish foreign minister Radek Sikorski in which he urged the European Central Bank to take on lender of last resort functions (precisely what Germany has been urging it not to do) in exchange for stricter binding continent-wide fiscal rules (which Angela Merkel made the centerpiece of her European policy at the recent CDU party conference). The basic policy idea is not new, but the idea here seems to be to frame it in a certain kind of way that’s designed the thread the various international tensions.
“I will probably be the first Polish foreign minister in history to say this,” he said, “but here it is: I fear German power less than I am beginning to fear its inactivity.”
The specific idea is to solve the crisis by having the ECB act as lender of last resort (which is basically what foreign economists have been saying for weeks needs to be done) plus this gigantic structural reform to European budget procedures:
Financial discipline would be strengthened by giving access to rescue funds only to members abiding by macro fiscal rules, by making sanctions automatic and giving the Commission, the Council and the Court of Justice powers to enforce the 3% ceiling on deficit and 60% ceiling on debt. Countries in excess deficit procedure would have to present their national budgets for approval by the Commission. The Commission would get powers to intervene in the policies of countries that could not fulfil their obligations. Countries persistently violating rules would have their voting rights suspended.
As I wrote yesterday, this idea will in many ways exacerbate the underlying problems with the Eurozone where divergent growth rates between different countries make it impossible to set appropriate monetary policy for everyone. At the same time, if this is the sweetener pill it takes to get the European Central Bank to do the job of a central bank it may be the best thing for the world.
Note that Poland itself has the good fortune to not be on the Euro. The problem Poland is facing is that a calamitous implosion of such a giant economic sphere is likely to be terrible for non-Eurozone countries and especially devastating to Poland, Sweden, Switzerland, and the United Kingdom which for obvious reasons of proximity have close economic ties to the zone.