Too much time has been wasted first underestimating the crisis, then overestimating the possibilities of an exit strategy, and now underestimating the signs of serious impatience on the markets. The most common phrase is: the knots are home to roost. The risk is that the comb breaks. It is enough to think that the euro will crumble, confidence in the American public debt and the dollar will go into crisis, with prospects of currency and trade wars. The diagnoses are clear: sum of errors, contradictions, gaps, delays. It is time to intervene immediately, without deluding ourselves that we have a magic wand. In summary, the steps to be taken are as follows:
1. Recognize that the crisis is systemic: it is no longer credible to deal with it with buffer tools, the effects of which wear off until they become counterproductive, such as the massive doses of liquidity introduced by central banks, which now make us fear inflation.
2. Broaden economic policy objectives. Remaining within Europe, there are only two significant objectives for the markets: price stability assigned to the ECB and fiscal stability decentralized to national governments. Their interaction has entered a vicious circle with the crisis: the ECB raises interest rates to combat inflationary expectations, higher interest charges worsen public finances, governments are induced to apply greater fiscal rigor which slows down development and further fuels inflation via indirect taxation. To break this destabilizing spiral it is necessary to broaden and update the objectives. The rate of development must be announced as a priority objective in this period of depressive crisis. This does not mean giving up monetary and fiscal stability. If anything, the objective of growth breaks the vicious circle between the two traditional objectives in favor of a stabilizing interaction.
3. Update the public debt reduction target to within the threshold of 60% of GDP, established in the mid-nineties, in other market conditions and with other growth prospects. The current average level is well above 85%. This means that the tax return objective must be governed by adapting it to the historical reference context to make it more credible in relation to the fiscal space to be recovered for development and to mitigate the speculative pressure on fiscal sustainability.
4. Establish an independent, transparent and credible supranational agency that subjects rating agencies to an accreditation system. Which are independent, but are not transparent and have a greater influence than their credibility, if evaluated on the basis of their sensational mistakes of the past. They perform a function of critical judgment on the solvency of public debts, which requires institutional recognition equal to the responsibility they assume.
5. Establish a European rating agency, as long as it respects the accreditation criteria and is independent even if issued by the public. It can broaden the information base to the benefit of the markets, specializing in medium-long term sustainability assessments of public debts and related repayment policies. In this way, the trend towards valuations influenced by rumors and short-term fears, unrelated to fundamental analysis, can be curbed.
6. Extend institutional control to over-the-counter markets, such as CDS, according to the rules of the official markets in terms of transparency and credibility of the assessments and accreditation and accountability of the operators.
7. Prohibit or at least limit over time the possibility of short selling of shares, which fuels downward speculation, with serious consequences on the stability of savers' financial portfolios.
8. Seriously consider issuing European bonds to increase the financial resources available to the European Community for stabilization and rebalancing interventions in the Community area. This measure goes in the direction of establishing a European fiscal government.
9. Submit European bonds to the judgments of accredited rating agencies, primarily by the European Rating Agency, to allow the ECB to accept them as collateral from banks that require liquidity. The guarantee of securities representative of the situation of average European fiscal sustainability will allow the ECB to reduce as much as possible the extraordinary acceptance of securities of individual states without taking into account their rating, as is the case in this period for Portuguese securities.
10. In conclusion, initiatives to safeguard free market assessments must be promptly implemented but with the competitive contribution of public actors whose evaluations offer points of reference to the market.
It is certainly difficult, but necessary to avoid an uncontrollable spin of the crisis.
