The euro zone is facing a systemic crisis, but exit or default are not solutions and a new compromise is needed between member states and financial investors, writes Maria João Rodrigues, professor of European Economic Policies at the Université Libre de Bruxelles and a policy advisor to the EU institutions.
This analysis was sent exclusively to EURACTIV by Maria João Rodrigues.
''Back to a euro zone crisis? The central problem
Once again, the euro zone has been facing the risk of systemic crisis. The central problem is not just Ireland, and other national cases that might follow; rather, it is the fact that the basis of the European instruments created in May to prevent sovereign default in the euro zone are being questioned by the country that carries the main burden of their cost.
The German government's insistence that investors should also share the burden by accepting a partial default of sovereign debt has raised a new wave of financial and political speculation against the euro. This reaction remains even after the recent announcement watering down the risk of default. This is frustrating the efforts made by the most fragile economies, which despairingly see their spreads rising even after adopting very tough austerity budgets.
This situation can have broader implications for the euro zone as a whole: divergences between spreads across member states might turn into divergences between public deficits and debts, and also into divergences between growth and unemployment rates. This prospect is undermining the long-term sustainability of the euro zone. As exit or default should not be considered as possible solutions, another one needs to be found out.
We also need to understand Germany's concerns. The motivation underlying the proposal for a partial default is not only to promote a reduction of the burden of (German) taxpayers, but also to use market pressure to impose stronger fiscal discipline, since it is felt that the Stability and Growth Pact will not be enough, even after the thorough reform it is being subjected to.
Hence, a new compromise is needed to be enshrined in the fast-track revision of the Lisbon Treaty. The fiscal discipline should be strengthened and coupled with a clear last-resort European solidarity. This should also be completed with more European cooperation for growth.
The solution: The need for a new compromise
First, what we need is not a prospect of partial default, but rather conditions to ensure that member states and financial investors lend and borrow more responsibly and effectively. The reform of the financial system is crucial for this purpose, but this should also be enforced with the fine-tuning of the recently created European instruments to deal with sovereign debt and the new one which will become permanent, the European Stability Mechanism.
These are historical instruments for the euro zone. Not only are they managed at the European level but they also permit the issuing of euro bonds, and thereby lending to member states with lower spreads.
- The euro zone should also be prepared to increase their resources, in order to prevent or to cope with other potential cases of speculative pressure and impose reasonable conditions to the markets. Ultimately, their issuance of euro bonds could be guaranteed not by national loans, but by the national budgets.
- Their conditionality should be fine-tuned to provide a credible path for fiscal consolidation encompassing spending and revenues, as well as full transparency and consistency in budget and debt management. The European mechanisms should work with the national debt agencies for this purpose.
- Moreover, conditionality should also be smarter enough to also address the need for economic recovery, which is indispensable for fiscal consolidation. We must safeguard means to support investment (including the co-financing of structural funds), job creation, education, and sustainable welfare systems. This should also be connected with undertaking the key national reforms in each national case.
Further, we also need a more comprehensive framework to guide the reform of the euro zone. We should be clear about which are the fundamental conditions necessary to safeguard long term-sustainability in the euro zone.
They are five: strong fiscal discipline and ensuring there is no sovereign default; an effective financial system; a common strategy for growth and jobs supported by national and European instruments; an effective European policy for regional convergence; and an effective external representation of the euro zone.
Assuming these should be the priorities to reform euro zone governance, where are we in this process? What should be the new compromise to be forged?
- The external representation is being improved in the IMF board, the G8 and the G20, but a lot remains to be done. Moreover, these efforts will be undermined if the euro zone is internationally perceived to be in a systemic crisis, which is presently the case.
- There is important progress with building a European supervision system; we should also underline the crucial role that the European Central Bank has played in containing the financial crisis. But while the financial system is being reformed, we need to do more precisely to ensure more responsible lending and borrowing. As for speculation against sovereign default, we need stronger mechanisms to limit the perverse effect of credit default swaps. It is deeply disturbing that the profits they generate increase with the risk of sovereign default, as this leads some financial actors to become fully focused on the failure of governments, whatever their political performance.
- The rules of fiscal discipline should be applied more automatically if they are smart enough to ensure fiscal consolidation coupled with growth. That is why fiscal surveillance should be combined with macro-economic surveillance. By building on such strong preventive and corrective rules, European instruments for financial stability could work as a guarantee of last resort against default in the euro zone, and all the abnormal situations could be swiftly corrected through the imposition of strong conditionality.
- As regards a European strategy for growth and jobs, the recently adopted Europe 2020 strategy requires stronger national and European instruments: we need the appropriate fiscal resources from national budgets to support investment, more resources for Community programmes, euro bonds to support long-term investment, and new sources of taxation such as a financial transaction tax and green taxes. The national reform programmes should be implemented with stronger financial means to move to a greener, smarter and inclusive growth. The conditionality of structural funds should also be strengthened so that they foster regional convergence more effectively.
The European leaders will be confronted with the need to agree on such a broader agenda to strengthen the euro zone. Only then they will fulfill their responsibility of making the best of a continent with such remarkable potential.''