Ending the euro-zone debt crisis requires greater political union and European-level banking insurance as well as more aggressive action by the European Central Bank, a band of economists said.
The report by the Institute for New Economic Thinking, a research institute founded by billionaire investor George Soros, rejected calls for permanent joint debt issuance, nor did it endorse fiscal transfers between the 17 members of the currency zone.
“Europe is sleepwalking toward a disaster of incalculable proportions,” economists including Daniel Gros, director of the Centre for European Policy Studies in Brussels, and Patrick Artus, chief economist at Natixis SA in Paris, said in the report released on July 23. “Over the last few weeks, the situation in the debtor countries has deteriorated dramatically.”
Almost three years after the sovereign debt crisis emerged in Greece, Spain and Italy are shouldering record borrowing costs, the euro is plumbing new lows and Germany’s top credit rating was called into question by Moody’s Investors Service as a result of the burden Europe’s biggest economy might have to bear to hold the euro together.
Greater political union is needed to impose unpopular budget cuts, the economists said, because “the fiscal compact has gone as far as possible” within “the democratic context of each sovereign state.”
While rejecting common debt issuance, the report did say that “legacy” debt could be pooled, as suggested by Chancellor Angela Merkel’s German Council of Economic Experts. Council members Lars Feld and Peter Bofinger were among the signatories. The report also recommended the creation of limited cross-border risk-free assets, so that future flights to safety would be decided between asset classes, not countries.
The euro zone also needs a lender of last resort, preferably the ECB, and the central bank should temporarily intervene more actively in the market to buy time and to help Italy and Spain escape their “self-fulfilling fiscal crises,” according to the economists, who also included Paul de Grauwe, a professor at the London School of Economics, and Erik Berglof, the chief economist at the European Bank for Reconstruction and Development.
Financial turmoil in the euro-area deepened this week after the Spanish region of Valencia said it will need aid from the central government, and Moody’s Investors Service put a negative outlook on the Aaa ratings of Germany and the Netherlands, saying they may need to bail out other member nations.
While rejecting so-called joint euro bonds, the report argued that surplus countries are obliged to help deficit countries because their problems were “not caused by these countries in isolation, but were the result of a flawed euro zone design.”
The report was written by Luis Garicano, a professor at the London School of Economics, and Jeromin Zettelmeyer, the EBRD’s deputy chief economist.