So the Eurozone is getting its $ 1 trillion "shock and awe" rescue package and markets are responding with enthusiasm. There has been a lot of discussion about this package, but one potential implication of this plan that has received little attention is that it may put in motion the beginnings of a Euro treasury market. Among other things, the plan calls for the creation of special purpose vehicle that will be able to raise up to $440 billion by issuing debt backed by the Eurozone countries. This description sounds to me a lot like a centralized fiscal authority for the Eurozone. Yes, it has been given only a three-year life, but once folks see that this entity is essentially a Eurozone Treasury it could morph into something more permanent--especially if it plays a key role in preserving the monetary union. And if that happens, a Euro treasury market will emerge that could provide stiff competition to the U.S. treasury market. Moreover, should there arise a Euro Treasury then the Eurozone will have eliminated a key barrier that prevents it from being an optimal currency area.
Update: Ambrose Evans-Pritchard sees the same implications:
Update: Ambrose Evans-Pritchard sees the same implications:
[T]he accord profoundly alters the character of the European Union. The walls of fiscal and economic sovereignty are being breached. The creation of an EU rescue mechanism with powers to issue bonds with Europe's AAA rating to help eurozone states in trouble -- apparently €60bn, with a separate facility that may be able to lever up to €500bn -- is to go far beyond the Lisbon Treaty. This new agency is an EU Treasury in all but name, managing an EU fiscal union where liabilities become shared. A European state is being created before our eyes.
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