Posts Tagged ‘european union’
For the first time in history, Britain has vetoed a new EU treaty. The purpose of the treaty was to impose tough new limits on budget deficits of member states. David Cameron argues that the new treaty would open the door to new financial regulations that would disadvantage Britain. His move is likely to prove popular in the UK, where a bare majority of voters with an opinion on the question favors leaving the EU altogether. The Europhiles at The Economist, however, are unimpressed. The remaining EU members appear headed for a new treaty technically outside the auspices of the European Union (however, there are obstacles, as Britain will likely insist that no EU resources be used for the new institutions).
From a strictly economic point of view, however, it was always unclear why Britain and other non-eurozone member states needed to be part of the treaty. Large budget deficits in Britain no more threaten the euro’s stability than do large budget deficits in Sweden or the United States. The European Central Bank has no reason to monetize British debt, and while British default – a highly unlikely prospect to begin with – would surely harm the European financial system, the ECB presumably would intervene in such an event by supporting financial institutions within Eurozone countries. As ever, the construction of new economic-policy powers for EU institutions is about politics: building a political-economic bloc with stronger economic bargaining power. Pay attention to Sarkozy.
According to this story from the Fortune blog, euro default insurance prices have risen so high that it now costs more to buy a credit default swap on German debt than on U.S. debt. And that’s Germany.
Now, Germany is not going to default. I think the real risk here is that now that the EU has broken the bailout seal, the euro will continue its decline and other countries will allow themselves to get into trouble. A spokesman for the Hungarian prime minister has already said that talk of default in that country is “not an exaggeration.” It may be that Hungary is now trying to shake some cash loose from the EU money tree, but creating market uncertainty is a risky way to do it.