Economic analysts in Germany are proposing new structures in the European Monetary Union as a result of the Greece crisis, saying an option to leave the eurozone should also be included. EURACTIV Germany reports.
In a special report for the German government, the Council of Economic Experts advocated on Tuesday (28 July) for lawmakers to reinforce the architecture of the monetary union.
Such measures should include a possibility to exit the eurozone, the government advisors said.
“A member state’s long erm unwillingness to cooperate can threaten the stability of the monetary union,” the special report read. As a result, the country’s withdrawal from the monetary union should therefore be available as a last resort, the authors said.
An integral component of improving the architecture of the monetary union is regulation of insolvency for states nearing bankruptcy, according to four of the five researchers.
One member of the advisory council, Peter Bofinger, expressed a dissenting opinion on several points in the special report.
“In order to maintain cooperation in the monetary union we have to recognise that voters in creditor countries are not prepared to provide long term financing to debtor states,” explained the chairman of the council of experts, Christoph Schmidt.
An insolvency mechanism is the right tool to counteract future crises, he argued.
>> Read: How the eurozone survived the Greek crisis
Like the creditor investment plan which is in place to deal with bank collapses in Europe, sharing losses in state bankruptcy should also be possible, they said. For investors, this offers the benefit of being able to more accurately assess the risk of default in state debt.
But the researchers said insolvency proceedings should not be initiated immediately. Instead, a transition phase should be implemented.
Researchers from the Centre for European Economic Research (ZEW) was also in favour of a regulated insolvency procedure.
It should be applied when loans from the European Security Mechanism (ESM) do not help improve the creditworthiness of a country threatened by bankruptcy, the researchers said.
After at least three years without improvement, the country would have to negotiate “restructuring of debt” with creditors and ESM, ZEW analysts indicated.
Meanwhile, the Council of Experts and the ZEW are divided over the necessity of European unemployment insurance.
ZEW researchers explained that such insurance could help “soften the blow of asymmetric economic shocks in the euro area”.
At the same time, the insurance could only be activated in “especially strong recessions”, ZEW said, and be paid out to the short term unemployed in receiver countries for a maximum of 12 months. Among other effects, this could minimise the risks of a transfer union in Europe, they pointed out.
But the transfer union is precisely what the economic analysts on the council fear would happen, if common unemployment insurance is implemented.
There is a risk that certain member states would remain permanently dependent on payments, said Freiburg-based Professor Lars Feld, one of the council members. And this will not change, he indicated, as long as the labour market policy of the euro states remains in the hands of national governments.
Background
Eurozone leaders reached an agreement on a programme to save Greece from bankruptcy after 17-hour talks on 13 July.
>> Read: Eurozone reaches ‘laborious’ tentative deal on Greece
If approved, this will be the third rescue programme for Greece in five years. It will be managed by the European Stability Mechanism (ESM), the eurozone permanent crisis resolution fund that was initially set up five years ago in an effort to save Athens from bankruptcy.
Here is a look at what Greece must do:
- request continued support from the International Monetary Fund after its current IMF program expires in early 2016
- streamline consumer tax and broaden the tax base to increase revenue. Laws on this are due by Wednesday
- make multiple reforms to the pension system to make it financially viable. Initial reforms are due by Wednesday, others by October
- safeguard the independence of the country's statistics agency
- introduce laws by Wednesday that would ensure "quasi-automatic spending cuts" if the government misses its budget surplus targets
- overhaul the civil justice system by 22 July to make it more efficient and reduce costs
- carry out product market reforms that include allowing stores to open on Sundays, broadening sales periods, opening up pharmacy ownership, reforming the bakeries and milk market and opening up closed and protected professions, including ferry transport
- privatise the electricity transmission network operator unless alternative measures with the same effect can be found
- overhaul the labour market. This includes reviewing collective bargaining, industrial action and collective dismissal regulations
- tackle banks' non-performing loans and strengthen bank governance
- significantly increase the privatization program, transferring €50 billion worth of Greek assets to an independent fund, based in Greece, to carry out the privatisations
- modernise, strengthen and reduce the costs of Greek administration, with a first proposal to be provided by 20 July
- allow members of the three institutions overseeing Greece’s reforms - the European Central Bank, IMF and European Commission, previously known as the 'troika" - to return to Athens. The government must consult with the institutions on all relevant draft legislation before submitting it to public consultation or to parliament
- reexamine, with a view to amend, legislation passed in the last six months that is deemed to have backtracked on previous bailout commitments.
Further Reading
German Council of Economic Experts (German language):
- Konsequenzen aus der Griechenland-Krise für einen stabileren Euro-Raum
- Sachversta?ndigenrat diskutiert Reformen fu?r einen stabileren Euro-Raum und regt ein staatliches Insolvenzverfahren an
Centre for European Economic Research (ZEW):