Economy

Can The Euro Be Saved? A Tough French Take On Germany’s Hardball Strategy

Op-Ed: With the euro on the brink of collapse, German Chancellor Merkel wants to exploit the acute crisis to impose strong fiscal discipline across the currency union. But facing a vicious cycle of low confidence, now may actually be the wrong time to tig

Sarkozy and Merkel in Paris, in 2009 (Anna Tesar)
Sarkozy and Merkel in Paris, in 2009 (Anna Tesar)
François Bourguignon

LES ÉCHOS/Worldcrunch

PARIS - Angela Merkel's strategy – that of taking advantage of the acute European debt crisis to introduce the strong fiscal discipline that the euro zone needs -- is understandable. So too is her reluctance to catapult Germany into a series of major rescue operations without any guarantee that its European partners are willing to accept such discipline. After all, once the crisis is stabilized, what would prevent them from falling back into their lax habits?

But the condominium is burning, and it will soon be useless to threaten fines against the owners of the various units for setting fires. First things first, that blaze needs to be put out, by ordering the European Central Bank (ECB) to place all its fire hoses at Europe's disposal. The markets have entered a vicious circle where originally theoretical projections of bankrupting states and banks drive up interest rates, which in turn increase the possibility of bankruptcy -- and rapidly creating a self-fulfilling prophecy. Soon, a country or a bank failing to refinance will be enough to trigger the apocalypse. It is high time we put an end to this spiral.

Two solutions are worth contemplating. The first one would be a massive intervention on behalf of the ECB so as to stabilize interest rates on the states' debts and ensure the liquidity of European banks -- following the example of the U.S. Federal Reserve or Bank of England. The second would be to issue Eurobonds so as to share the European debt, and thus allow some breathing room for European countries that have been hit by the markets.

German fears are real

There are two reasons for Germany's reluctance vis-à-vis these hypothetical solutions. The first is the fear that the ECB might become something more than just a custodian of price stability, and might start going too easy on struggling countries. The second is that Germans fear having their hands tied, and forced to be answerable for the debts coming from careless members.

Removing these obstacles and ensuring the survival of the euro can be done in two steps. First of all, the ECB must be released from its shackles as soon as possible so that it can maneuver on the market of government debts, without relieving the pressure on countries that need to adjust. A commitment from the ECB not to let its member countries' "spreads' exceed a given threshold -- let's say 50% of the current levels — will help put the mad increase on hold for a while. Once things have settled down, it will then be possible to address the question of Eurobonds and that of revising treaties.

This will necessarily take time, since it will undoubtedly require consulting national parliaments or even popular referendums. As for the stability of markets, the only thing Germany needs to do is to announce that it pledges – together with a strong group of partners -- to participate in the issuing of Eurobonds, in exchange for a revision of the Stability and Growth Pact. Germany has proved its rigor more than once, while also demonstrating its deep attachment to Europe. Together, this provides the basis of credibility that would allow national adjustments to be made away from the turmoil of the markets.

Read the original article in French

photo - Anna Tesar

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