All the troubled economies, solvent or insolvent, need a renewed programme of structural reform and liberalisation. Freeing up services and professions, privatising companies, cutting bureaucracy and delaying retirement will create conditions for renewed growth—and that is the best way to reduce debts. How to prevent contagion? A Greek default would threaten many banks, not just in Greece: this week the markets took aim at French banks that hold southern European debt.
Moreover, solvent countries need a breathing-space to push through reforms. That points to agreeing to two measures at the same time: a scheme to shore up the banks, which may take months to put into practice, and a rock-solid promise to support solvent governments, which has to be immediate.
How to save Italy: Don’t
The recapitalisation of Europe's banks must be based on proper stress tests which should this time include possible default on Greek sovereign debts. Some banks may be able to raise money in the equity markets, but the most vulnerable will need government help. Core countries like Germany and the Netherlands have enough cash to look after their own banks, but peripheral governments may need euro-zone money.
But it also makes sense to set up a euro-zone bank fund, together with a euro-zone bank-resolution authority.
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That is part of the longer-term institution building. However, the ECB could help the banks by giving a commitment to provide unlimited liquidity for as long as it is required, rather than a rolling six months, as now. None of this will work unless the Europeans create a firewall around the solvent governments. That means shoring up euro-zone sovereign debt. What if the markets suddenly took fright over Belgium or France?
Some have argued for a system of Eurobonds in which every country's debt is backed by all.
But the political oversight to ensure that high-spending countries do not fritter away other people's money would take years to sort out—and one thing the euro zone does not have is time. The answer is to turn to the only institution that can credibly counter a collective loss of confidence on such a scale.
The ECB must declare that it stands behind all solvent countries' sovereign debts and that it is ready to use unlimited resources to ward off market panic. That is consistent with the ECB's goal to ensure price and financial stability for the euro zone as a whole. So long as governments are solvent and the bank sells the bonds back to the market after the crisis, this does not amount to monetising government debt. In today's recessionary world, the ECB could buy several trillion euros-worth of bonds without unleashing inflation.
Even so, this is a huge step. The ECB's German officials have taken to resigning in protest at the limited bond-buying undertaken so far. They fear not only that so young an institution is vulnerable to a loss of credibility, but also that the ECB, which is independent but unelected, could become embroiled in political decisions—especially by declaring a state insolvent and cutting it off. Both these longer-term risks are real, but they are far outweighed by the need to stop the rot.
It would be a nonsense if the ECB's dogged defence of monetary rigour led, say, to an Italian default and a global depression. Put our plan to many Europeans—creditor Germans, debtor Greeks or Eurosceptic Britons—and they may moan that this is not what they were promised when the euro was set up.
Completely true, and sadly irrelevant. The issue now is not whether the euro was mis-sold or whether it was a terrible idea in the first place; it is whether it is worth saving. Would it be cheaper to break it up now? And are the longer-term political costs of redesigning Europe to save the euro too great?
The sobering truth about the single currency is that getting in is a lot easier than getting out again. Legally, the euro has no exit clause. If Greece stormed out, and damn the law, as it might yet have to do, it would suffer a run on its banks, as depositors withdrew euros before they were forcibly converted into devalued new drachma.
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It would have to impose capital controls. Greek companies with international bills would risk bankruptcy, as they would suddenly be without the cash to cover them; and the pressure on other wobbly countries would increase. That is why we favour restructuring Greece, but letting it stay in the euro. If, on the other hand, a strong country like Germany walked out of the euro, probably taking other strong countries with it, the result would be just as terrible. The new hard currency would soar, hitting German exporters. Turmoil in the rump of the euro zone would batter export markets just as the north's firms became less competitive.
German banks and companies, in a mirror image of what would happen in Greece, would suffer from the sudden devaluation of euro assets outside the new hard-currency zone. And the rump might still break apart, as Italy or Spain would not want anything to do with Greece.
The euro could be nearing a crisis – can it be saved?
Amid the debris of broken treaties, wild currency swings and bitter recriminations, Europe's single market could collapse and the EU itself—the rock of the continent's post-war stability—could start to crumble. Attaching hard numbers to any of this is difficult. Yes, that is a guess as are the various estimates for the ongoing costs of break-up and those of a bail-out in future years.
But the immediate bill for a break-up of the single currency would surely be in the trillions of euros. By contrast, a successful rescue would seem a bargain. Add together the money already spent on rescues, to what is needed to recapitalise European banks and any potential losses to the ECB, and the total will still only be in the hundreds of billions of euros.
If the ECB's intervention is bold and credible it might not even have to buy that much debt, because investors would step in.
In short, the euro zone would be reckless to flirt with collapse when an affordable rescue is possible. German taxpayers might accept that the immediate costs of our rescue plan are smaller than break-up.
But what they detest is the idea that it might let feckless Italians and Portuguese off the hook. Safe in the knowledge that the ECB stands behind their bonds, they may shy away from reform and rectitude. Two risks flow from this. The immediate and real one is that furious Germans will demand that Greece is thrown out or bullied out of the euro to frighten the others.
Such a horrific event would indeed scare Portugal and Ireland, but a threat to expel Italy or Spain is empty: they are too big and too tightly tied into the EU. Simply chucking out Greece because it was convenient would permanently undermine the security of small members of the EU. Besides, once Greece defaults and restructures, its economy stands a good chance of making a credible start on its long journey to economic health.
Fans of political integration say that the only way to enforce discipline is to create a United States of Europe see Charlemagne. Perhaps a fiscal union that would supervise the issuance of common Eurobonds? Or a new supervisory role for euro-zone governments, or, heaven forbid, the useless European Parliament? Somewhere behind this also looms the idea that the ins will now be able to boss around the outs.
And, this being Europe, there is every chance that the politicians will try to avoid discussing a lot of this with their electorates.
Explore our interactive guide to Europe's troubled economies. The Economist concedes that our rescue plan begins with a democratic deficit that needs to be fixed if steps towards closer fiscal union are to work. Even if growth eventually recovers, GDP never reaches the level it would have attained had a more sensible strategy been pursued. The alternative is to shift more of the burden of adjustment on the strong countries, with higher wages and stronger demand supported by government investment programmes. We have seen the first and second acts of this play many times already.
A new government is elected, promising to do a better job negotiating with the Germans to end austerity and design a more reasonable structural reform programme. If the Germans budge at all, it is not enough to change the economic course. Anti-German sentiment increases, and any government, whether centre-left or centre-right, that hints at necessary reforms is thrown out of office.
Anti-establishment parties gain. Gridlock emerges. Across the eurozone, political leaders are moving into a state of paralysis: citizens want to remain in the EU, but also want an end to austerity and the return of prosperity. Ever hopeful of a change of heart in northern Europe , troubled governments stay the course, and the suffering of their people increases. Costa managed to lead his country back to growth 2. Italy may prove to be another exception — though in a very different sense. There, anti-euro sentiment is coming from both the left and the right.
Italy is large enough, with enough good and creative economists, to manage a de facto departure — establishing in effect a flexible dual currency that could help restore prosperity. This would violate euro rules, but the burden of a de jure departure, with all of its consequences, would be shifted to Brussels and Frankfurt, with Italy counting on EU paralysis to prevent the final break. Whatever the outcome, the eurozone will be left in tatters. Germany and other countries in northern Europe can save the euro by showing more humanity and more flexibility.
- Grave Secrets.
- Concepts To Save The Euro;
- Concepts to save the Euro: trosceplamsti.cf.
But, having watched the first acts of this play so many times, I am not counting on them to change the plot. Topics Eurozone Project Syndicate economists.