When the world gets closer.

We help you see farther.

Sign up to our expressly international daily newsletter.

Economy

What If DSK Had The One Great Idea To Save The Euro?

DSK speaking at the YES conference
DSK speaking at the YES conference
Nicolas Barré

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.

You've reached your limit of free articles.

To read the full story, start your free trial today.

Get unlimited access. Cancel anytime.

Exclusive coverage from the world's top sources, in English for the first time.

Insights from the widest range of perspectives, languages and countries.

Photo of rescue teams trying to reach trapped residents inside collapsed buildings in Diyarbakir, after a 7.8 earthquake devastated southeastern Turkey and parts of Syria. An estimated 1,300 have died, with the death toll expected to mount.

Rescue teams in Diyarbakir, after a 7.8 earthquake devastated southeastern Turkey and parts of Syria, killing at least 1,500.

Anne-Sophie Goninet, Hugo Perrin and Inès Mermat

👋 Salibonani!*

Welcome to Monday, where a 7.8-magnitude earthquake kills more than 1,500 in southern Turkey and Syria, Iran pardons tens of thousands of prisoners, and Beyoncé makes Grammy history. Meanwhile, Ukrainian journalist Anna Akage lists the five reasons why Vladimir Putin may be planning a major assault on Ukraine before the end of the month.

[*Ndebele, Zimbabwe]

Keep reading...Show less

You've reached your limit of free articles.

To read the full story, start your free trial today.

Get unlimited access. Cancel anytime.

Exclusive coverage from the world's top sources, in English for the first time.

Insights from the widest range of perspectives, languages and countries.

The latest