The eurozone faces economic disaster unless its financially stronger states and its central bank commit to bearing a larger share of the region's debt burden, leading global economists including two advisors to the German government said.
"We believe that … Europe is sleepwalking towards a disaster of incalculable proportions… The sense of a never-ending crisis, with one domino falling after another, must be reversed," the Institute for New Economic Thinking (INET), backed by veteran investor George Soros, wrote in its report.
Policymakers must tackle two problems separately – dealing with the legacy costs of the "initially flawed design" of the eurozone, and fixing the structure of the bloc itself.
Among their recommendations, the economists called for an early partial mutualisation of the region's debt – which Germany has refused to consider – and the eventual creation of a supranational financial watchdog with authority over national regulators.
They also urged the European Central Bank to become a lender of last resort in the longer term for states that meet budget targets, or allow the region's ESM rescue fund to play that role and give it a banking license.
The ECB has hitherto strongly objected to both options, though central bank policymaker Ewald Nowotny said on Wednesday there were arguments for giving the ESM a banking licence to increase its capacity. Nowotny's comment reinforced indications that the eurozone crisis has entered a dangerous new phase, with Spain edging towards a full sovereign bailout and evidence mounting up that Greece cannot meet the terms of its emergency funding, possibly triggering its exit from the single currency.
The New York-based INET said although Europe's leaders recognised the need for a collective response, surplus and deficit countries had so far failed to agree on a plan that convinced markets and addressed public needs. Steps taken at recent summits did not go far enough.
"Solving the current crisis … is a win-win choice for both creditor and debtor countries … however lack of trust between creditors and debtors is stopping them from arriving at mutually beneficial solutions," the report said.
The 17 economists who authored the report, including Lars Feld and Peter Bofinger from the panel of 'wise men' who advise Berlin on policy, recommended urgent short-term measures.
As well as the "partial and temporary mutualisation of debt" under which the ECB should commit to greater purchases of sovereign debt, countries with fiscal surpluses should also prop up demand across the eurozone as a whole.
Any further steps towards burden-sharing would likely meet with stiff resistance in Berlin, which has contributed most to the region's existing bailout programmes and faces another heavy hit should Athens fail to honour its debts.
If Greece become insolvent and quits the eurozone, Germany should expect a loss of up to €82 billion, while if an insolvent Greece remains within the single currency bloc it would cost Berlin €89 billion, Germany's Ifo economics institute estimates.