EU: Closing the Barn Door after the Horses Fled

One vocal camp says European Monetary Union will disintegrate in the face of this crisis. We have consistently argued that while possible, such a scenario is unlikely because of the political will and commitment.

We argue that on the other side of the crisis, it is more likely that there will be greater integration (loss of sovereignty) and greater institutional capability.

To this end we note that Luxembourg's Prime Minister and Eurogroup head Jean-Claude Junker has proposed that member governments submit spending plans to the Eurogroup of finance ministers prior to allowing national parliaments vote on the budget.

While such a rule is too late to address the current crisis, it seems like it is a step in the direction we would anticipate. It also demonstrates that European officials are not going to simply let the great experiment of our time--monetary union without political union, get torn asunder because of roughly 30 bln euro (this year) obligation for Greece, which was not even a founding member of EMU.

Part of the problem of course is that Europe did have a Stability and Growth Pact that even included fines for violators. It was not the Mediterranean countries that flouted those rules and watered down that mechanism. It was Germany and France.

In terms of the current crisis, we remain concerned that the cost of servicing Greek's debt will be so onerous in economic and political terms that closure will remain elusive. We also remain concerned that European officials either do not have the will or the capability to get ahead of the curve and therefore continue to risk contagion. Lastly, we are also troubled the likelihood that aggregate demand remains too weak in the euro zone as a whole to make much headway in closing the substantial output gap.