Daniel Korski

A “two stone” solution to the Euro crisis will unbalance the coalition

A "two stone" solution to the Euro crisis will unbalance the coalition
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Whatever the British government wants, moves are now afoot on the Continent to address some of the structural problem with the Euro. They may in the end lead to some form of fiscal federalism.

So far they are not supported by Angela Merkel, the key decision-maker, who worries constantly about the court in Karlsruhe, which has set clear limits on further European integration. But they are said to be supported, at least in part, by Finance Minister Wolfgang Shauble.

Writing in the Financial Times, Frank-Walter Steinmeier and Peer Steinbrück argue that the EU needs "a more radical, targeted effort to end the current uncertainty, and provide stronger support for the future of Europe’s common institutions. This must also protect the European Central Bank from becoming Europe’s “bad bank”, and ensuring its credibility and independence in guarding a strong euro."

What do they propose? "A combination of a haircut for debt holders, debt guarantees for stable countries and the limited introduction of European-wide bonds in the medium term, accompanied by more aligned fiscal policies. These measures would only work together; none alone would restore stability."

European bonds have been issued before but European finance ministers have rejected their permanent introduction. The alternatives - increasing the European budget, debt restructuring and greater fiscal coordination - are not favoured by Eurozone leaders either. On the other hand, few European leaders will want to oversee the collapse of the Euro. So many will probably accept some smaller form of the "Two Stone" package - i.e that proposed by Steinmeier and Steinbrück.

This is the last thing Messrs Cameron and Clegg need. Any move towards European fiscal integration will threaten the coalition and increase the pressure on the Prime Minister by the 1922 committee.