Euro zone crisis: Is the EU’s political suicide the only solution?

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV Media network.

European leaders must be desperate to consider their main external partners, via the IMF, as the new solution to save the European economy. Should they accept this, they will enter world history as those who buried the European project and turned Europe into a second-rank actor, writes Maria Joao Rodrigues, a former Portuguese minister and adviser to the EU institutions.

Maria Joao Rodrigues is a former Portuguese minister and EU policy adviser in charge of the Lisbon Strategy, Lisbon Treaty and Summits with the EU’s external partners. She sent this contribution in exlusivity to EURACTIV.

"European leaders must be desperate to consider the IMF as the new solution to save the European economy. Should they accept this, they will enter world history as those who buried the European project and turned Europe into a second-rank actor.

Is this the “decisive action” to be presented by the EU at next week's G-20 Summit in Cannes? The eurozone crisis should not push us to such major political consequences. Europe can have other internal solutions.

Due to mismanagement, the eurozone crisis has reached a new, dangerous, stage. The contagion is spreading across sovereign debts and across banks, fuelling each other. The central imbroglio of the last Summit is still to be sorted out: what can be the size of the Greek debt haircut, how to protect banks, how to stop contagion over bigger European economies, how can EFSF be strengthened? What should be the implications of these decisions to the larger framework of European economic governance?

More particularly, many divergences remain over the way to give more firepower to the EFSF in order to stop the contagion. A large range of possibilities was considered and the French proposal of providing unlimited access of EFSF to European Central Bank resources by equipping it with a banking license was promptly rejected by Germany. It seems that only two options are left: first, the insurance mechanism on debt issuance risks to be created by EFSF is already revealing its flaws; second, a special purpose vehicle (SPV) to be engineered with the IMF to channel contributions from the US, China, Brazil and others.

In fact, another simpler and stronger solution can be considered. The ECB should be allowed to do something which is easily done by its counterparts in the US, UK, Sweden or Denmark: provide a credit line to stabilise the secondary debt market, deter speculation and to restore confidence in the financial markets.

Such a solution would have several advantages: it would release the ECB from this kind of non-traditional responsibility; no more financial contributions would be requested to the Member States in order to strengthen the EFSF; the risk of inflation would be minor as the main risk is now a credit shortage and a new recession; and moral hazard can be avoided by tightening this instrument to clear conditions (see detailed proposals here).

Moreover, this logical and strong policy development to overcome the eurozone crisis should be underpinned by a comprehensive deal, making this last resort depend on stronger responsibility for fiscal discipline, structural reforms and combining it with a more effective coordination for growth and convergence. The Euro-plus Pact should frame a deeper coordination of policies in the budgetary, tax, economic, social and financial area in order to promote not only fiscal sustainability but also competitiveness, growth and job creation. This is the only lasting solution to overcome the eurozone imbalances.

No, we don’t need an EU political suicide to overcome the eurozone crisis. We just need to recall an episode of the rich European tradition: the moment Alexander decided to cut the Gordian knot that nobody could untie, because it was too intricate. After that the precious chariot could move forward."

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