It's not an impossible mission. At the summit of European leaders, which will take place on Thursday 28 and Friday 29 June, the authorities of the euro area must find concrete solutions to deal with the debt crisis that has been going through the Old Continent for over a year, and beyond. Stefano Micossi, General Manager of Assonime and member of the Board of Directors of Ceps (Center for European Policy Studies) analyzed the situation and proposed these solutions to the European Council to deal with the crisis. We summarize them again.
AIM FOR GROWTH – The draconian application of austerity measures, which has had a largely unexpected recessionary effect, is sinking the entire Eurozone. Many countries are losing their competitive positions vis-à-vis Germany and this is a source of inflationary pressures in the region. The time has therefore come to change strategy, and to get back to growth as soon as possible we need: iImplement the internal market in the energy, transport and communications sectors (broadband connection); mobilize all funds at Community level to support these investments; clarify and announce that budget deficits due to an economic slowdown higher than expected must not be offset by further fiscal restrictions, as is already advocated in the new Growth Pact; finally as regards the cases of Greece e Spain, the European Council should loosen budgetary targets, which are impossible to achieve in their conditions. It is inevitable that a major part of the adjustment will fall on the Germany. The largest economy in the Eurozone must operate one internal reassessment, a major stimulating domestic demand e more aggressive liberalisations of the banking system and network services.
ECB SUPPORT – The European Central Bank absolutely needs to start taking on a more active role. First of all for economic activity and European exports devaluation of the euro against the dollar around 1,10 that would be excellent news, as inflation approaches the 2% target and is expected to fall below that limit at the end of the year. Furthermore, the ECB must further cut interest rates (down to zero) and start quantitative easing through the purchase of long-term sovereign bonds: this operation would reduce spreads and calm tensions on the financial markets.
BANKING RESTRUCTURING AND BANKING UNION – The negative spiral triggered by the increase in sovereign debts and the banking crisis has been aggravated by the decision to repay all creditors and to shift the weight of the rescue packages to public budgets. Indeed, use the Financial Stability Facility (EFSF) – €200 billion of residual funds – to directly inject capital into troubled banks, like Bankia, it would have been a more effective alternative: it would have avoided the bank insolvency crisis affecting governments and restored confidence in the markets. Furthermore, it is undeniable that the use of the EFSF would have avoided the birth of a new class of primary creditors vis-à-vis the Spanish Treasury, which will inevitably lead to a flight of secondary creditors towards safer assets. But to move towards the banking union, two other requirements are necessary: that the conditions required of the banks are negotiated directly with the EFSF, with the assistance of the ECB; is that the shareholders and creditors of the banks requesting help assume their share of the loss.
CONTROL YOUR EXCESS DEBT – The debt/GDP and deficit/GDP ratios of the Eurozone are not so different from those of other advanced countries. Despite this, however, the EU is the victim of a profound distrust on the part of the markets. As De Grauwe has already written, the roots of this pessimism lie in the flawed institutions of the monetary union. There are three main weaknesses that have emerged since the crisis in Greece: 1) There is no membership safety system for divergent fiscal policies in countries 2) to Monetary policy alone has led to low real interest rates in high-inflation countries and high interest rates in low-inflation countries providing incentives for the former to increase deficits and private credit growth, and for the latter to reduce investments. 3) The lack of connection between monetary (centralized) and fiscal (decentralized) powers it created a de facto vacuum that prevented the necessary exploitation of monetary instruments to counter financial shocks. These three problems must be managed and resolved simultaneously.
History shows that for a monetary union to work you need one debt mutualisation and a centralization of taxation able to fortify the central bank in the event of large financial shocks; of a effective obligation to balance public budgets and a no-bailout law limiting sub-federal levels of government; and of one central bank free to operate to deal with liquidity shocks e trust. But this can only be achieved in a context of federal union.
WHAT TO DO WHILE WAITING FOR POLITICAL UNION – While waiting for an effective federal union, the European Council must put together intermediate solutions capable of curbing the crisis and restoring confidence, of creating a bridge to reach the ultimate goal. Ultimately, the European Central Bank must begin to operate: when the point of no return is passed, there are not many alternatives but to intervene to curb the contagion. However, the tasks of the ECB would be confused and exposed to enormous risks if the member states cannot count on a solid agreement to address the issue of excessive accumulation of sovereign debts. The ratification and implementation of the Fiscal Compact is therefore an essential component for rebuilding mutual trust within the Eurozone, and must be implemented with the greatest urgency and priority.
Finally you absolutely need some kind of mutualisation of sovereign debts. This for two reasons: first of all there is an urgent need for reduce spreads that they are leading to dangerous dynamic instability; moreover, the political support for this painful and protracted adjustment program cannot survive without it stronger signals that the sacrifices will bear fruit.
PARTIAL MUTUALIZATION OF DEBTS – The bad news is that German taxpayers need to be convinced that they are not being asked to compensate other people's debts. The good one is that the proposal for a debt redemption fund (European Redemption Fund) exists and was advanced precisely on German soil, by Chancellor Merkel's Council of economic experts. The idea is simple. The Eurozone is experiencing a particular, temporary situation: there is no need for debt mutualization now and forever. A single and exceptional agreement would be enough to give governments control of their destinies. The proposal provides for put all sovereign debts in excess of 60% of GDP into the redemption fund (the debt of the nations that have asked for aid would be excluded). The "mortgage fund" of Eurozone bonds it would issue 25-year bonds jointly guaranteed by all eurozone members. Since European debt is, in principle, not a problem, removing the uncertainty of default, thanks to the common guarantee, could lead to a immediate relief for the interest rates of the most indebted countries. Each member would continue to pay their debt, pro rata, until the redemption was complete. After 25 years, all debts would be repaid and in the meantime, countries will have committed to achieving a debt-to-GDP ratio of 60% or less. In this way, on the one hand, Germany would bear part of the risks of the debts of the peripheral countries, but on the other, it would be sure that it would not have to pay the debts of the others. The fund would be a temporary instrument and over time, moving towards federal union, these securities could be replaced directly with the Eurobonds of the federation.
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