Sir, The conclusion reached by Anatole Kaletsky (“To save the euro, the crisis must get worse”, Opinion, June 29) after his perceptive analysis of the Greek crisis is that to save the euro there must be a fiscal federation. This is neither a necessary nor a sufficient solution.
It is not sufficient because it would leave the original cause of the crisis unaffected. The one-size-fits-all monetary policy, which is unavoidable in the eurozone, is inappropriate for countries with high rates of inflation — eg, the crisis countries Greece, Ireland, Portugal and Spain — as it leaves them with negative real interest rates and a huge appetite for borrowing. Even with a fiscal federation this problem would remain.
It is not necessary because the only way to offset an incorrect monetary policy is to have a suitably tough fiscal policy. This can be implemented and tailored to each country’s situation, without a fiscal federation. Even worse, a fiscal federation with a one-size-fits-all fiscal policy would fail to be tough enough for high-inflation countries.
Professor Michael Wickens
Professor of Economics, University of York and Cardiff Business School