PARIS - Is there a way that the countries of southern Europe can avoid sinking further into debt at unsustainable interest rates, without resorting to euro bonds, which Germany refuses to consider?
Former IMF director Dominique Strauss-Kahn has an idea that he presented this past weekend at the YES (Yalta European Strategy) Forum which was held recently on the Black Sea coast.
(The speech is the latest effort by the disgraced French politician to reestablish his credentials as one of the world's top economic thinkers after his fall from grace over a series of sex scandals)
Strauss-Kahn explained to the distinguished gathering that since the beginning of the euro zone crisis, the debt of the sturdiest economies, like Germany and France, has become more and more sought after. Investors’ "flight to quality" is leaving the most fragile countries deeper in debt and paying higher and higher interest rates.
"If we continue like this, the system will collapse,” said DSK. He suggests that the countries with higher ratings, like Germany, "put back into the pot part of their interest rate spread" to help countries like Spain or Italy.
Euro bonds, which would be issued in the name of all euro zone countries, would allow the same thing, "but the Germans refuse to consider them because they do not want to take on the debt. Therefore, we must find another solution, and act on the flow of funds," Strauss-Kahn argues.
Calming markets, buying time
In the mechanism he proposes, the countries of the euro zone would get together every two weeks and decide to surrender part of the interest rate spread to the weaker economies: 150 basis points [one hundredth of a percentage point, or .01 %; basis points are used in discussing interest rates] from Germany, 80 from France, and so on.
“These countries have an interest in accepting a surcharge in order to avoid the complete collapse of the euro zone. In any case, it would be a temporary measure, which would allow interest rates to return to reasonable levels and would calm down the markets," he said.
Strauss-Kahn believes that this measure would have the same advantages as euro bonds without their disadvantages, as "each country would remain responsible for its own debt." To his mind, the relief that this would bring to the cost of financing the debt would not hurt reform. On the contrary, "Nations must return their public finances to health, but they also need time, or the entire system is heading for catastrophe."
At Yalta, DSK's idea was praised by Niall Ferguson, professor at Harvard, and Robert Zoellick, the former head of the World Bank. The question now is whether it will gain traction in European capitals.
