Belfast Telegraph

All roads lead to Rome... well in this case Berlin

By Brendan Keenan

Render unto Caesar the things that are Caesar's must be one of the best-known phrases in the language. It is perhaps less well known, in these irreligious times, that the original complaint was about tax.

Not unlike certain folk in Greece and Ireland, the ancient Jews regarded paying taxes as a sin.

In their defence, the taxes were being paid to the Roman occupier, and a Roman tax collector made modern revenue collectors look like cuddly toys.

The famous answer to their complaint has to do with the fact that the tax was paid in Roman coinage, and Caesar's head was on the coins.

As the Greek dust settles (an apt metaphor: few believe the dust has actually been blown away), the nature of the European currency itself has come under scrutiny.

As indeed has the nature of paper money itself. Among the many things I never expected to see is the re-emergence of a serious argument as to whether we might not be better off trading in bullion again.

Pieces of eight and Spanish doubloons were the stuff of my boyhood fiction, but anyone who has any will have done very nicely, thank you.

The proper name for paper currency - most of which is simply a record, not even paper banknotes - is "fiat money". Caesar, although he demanded gold and silver coins, would have understood that. Its Latin meaning is close to the 'Star Trek' command, "Make it so". Fiat money exists by government decree.

It is accepted as money because people have confidence in the government's ability to keep the implicit promise to maintain the value of the currency.

In the wake of the eurozone crisis, several economists have argued that confidence requires more than just a promise. It needs power - Caesar's power to tax.

The gist of it is that the power to take real resources from the productive economy in the form of tax, to provide a foundation of real value for paper money, is essential for the "fiat" to be believed.

All eurozone governments raise taxes, albeit some more successfully than others. Defenders of the euro have pointed out that, taking the entity as a whole, its debt levels and external trade position would fully support a healthy currency.

Currency markets appear to agree to some extent. Despite everything, the euro itself is not weak - a point which is often missed. At $1.35, it is towards the high end of its 13-year existence.

The weakness is not in the whole, but in the constituent parts, with a clear lack of confidence in the currency in several countries.

This is very much the case in Ireland, reflected in both the withdrawal of deposits from Irish banks and the endless discussions about what would happen if we left the single currency.

Risk differences can be accommodated to some extent in a single currency, as it is between the states of the US, but the euro differences are likely to exceed tolerable levels.

Pooling the risk, by having some borrowing done by the eurozone as a whole, through 'eurobonds', is the first option, but is that enough without the taxing powers as well?

Suddenly, a financial crisis has opened the biggest political European question of all: can the crisis be solved without some kind of eurozone democracy?

Even more suddenly, and surprisingly, the great question is being openly discussed. The reluctant, acting, interim caesar, Angela Merkel, is meeting other heads of government for informal chats on precisely this matter.

Enda Kenny was one of the first to have a friendly dinner in the Meseberg Palace on this most unfriendly of topics. He will have noticed - perhaps even heard again - the chancellor's comment that Europe is on an "irreversible course" towards a political and fiscal union.

We do not know whether the taoiseach was already aware that there would have to be a referendum on the fiscal union. Beyond that, the taxing powers of individual states would be limited further - although perhaps not fully harmonised - on top of the legal constraints on budgetary policy contained in the fiscal treaty.

One hopes Mr Kenny enjoyed his dinner, but there is every reason why he might not have. Fundamental political reform would mean more treaty changes, and therefore more referendums.

If the creation of a real power behind the euro is to have any chance of success, it may mean drawing up a proper constitution, of the kind fluffed by the drafters of Lisbon, and a single great vote - in our case by referendum - as to who wants to sign up for the new political entity.

Practical imperatives may force eurozone governments down the most impractical of political roads. The outcome is anyone's guess.

One can say with more confidence that the traditional Irish government approach to any such development - essentially that we shouldn't worry our little heads about it - would be even more spectacularly unsuccessful than in the past.


From Belfast Telegraph