The proposals being pushed mainly by Germany that involve federal oversight of national budgets for Eurozone members does not strike me as something that should assure anyone thinking of lending money to Europe.
According to the German narrative, a list of various non-German countries that for some reason we have decided does not include France, due to moral weakness, went deeply into debt implicitly guaranteed by Germany. This was not simply because of poor leadership, but rather because of poor decisions by those leaders forced on them by the people of those countries. Democracy should die now that it found the keys to the treasury.
Actually they found the keys to the German treasury, those crafty Greeks. To remedy this, German will oversee the budgets of these creditors to make sure they exhibit proper Germanic temperance.
I'm not really interested in if this narrative makes sense, maybe something on that later. What I am worried about is whether this federal oversight will be constructive, and will it drive down the price of European debt. For several reasons, I think no. Actually, it could be quite harmful.
To start off with, I think that this oversight will amount to shallow austerity rather than deep structural reforms. German and French banks own a lot of debt that they wish they didn't and wish they could get out of. They need to get their money back. The long term, less important. What Europe in general, and the countries like Italy, Greece, and Spain in particular, needs to focus on is increasing competitiveness. For example reforming Europe's two-tier labor market. These are longer term problems, but they need to be addressed. Short term austerity, however, would be down right harmful.
Also, I don't think that Germany will help these countries' competitiveness because they are competitors. Sure, they want to see these countries do well, but not if it means attracting businesses with low taxes or low wages. You can already see this in Franco/German insistence that Ireland raise corporate income taxes. It seems that the word competitive is often preceded by the word unfair in the EU. Just imagine the moral outrage if one of these countries managed to attract a major investment from Opel.
But most importantly, taking away national sovereignty is not going to increase the nation's willingness to pay. And sovereign debt crises are about willingness not ability to pay. Already in Greece we see the social contract under stress. If you are going to ask people to sacrifice through higher taxes or lower benefits, then you need to give them some sense that they are doing it in the interests of their nation. And you need to give them some control as to how.
