In today’s Financial Times, Wolfgang Munchau identifies correctly the problem with the current EU strategy for arresting the euro crisis (click here for his article). His proposed solution is also on the ball. Indeed, it is, in substance, very, very similar to our Modest Proposal. However, though he identifies the problem and the essence of a workable solution, he falls in the trap of thinking that only large scale institutional change (of the type that is politically impossible) would do the trick. This is unfortunate. For there is a strategy of effecting a solution with minimal institutional change. Read on for my reply to his gloomy conclusion. The gist of my point is: All those who, like Wolfgang, have the capacity to recognise both the true nature of the problem and the type of solution that can deal with it, must seek ways of formulating their proposal in terms of the current structures (rather than enter into the no man’s land of invoking federalism). But to do so, we must all first stiffen our lip and tell our leaders that there are no excuses for not acting immediately:
Dear Wolfgang. You are spot on regarding what needs to be done. But you are wrong in your assessment that it requires regime change of a type that is politically impossible. The crisis could deflate quickly in two steps, the first of which requires no institutional change whatsoever: The ECB and European Commission convene, jointly, a Conference (in Brussels or even better in Frankfurt) to which they invite: (a) the Heads of the heavily indebted countries (which includes Spain, Italy and Belgium), and (b) Representatives of the banks holding the bulk of their bonds. In that conference the ECB offers the banks guarantees of extending its liquidity provision for ten years, if need be, in exchange for the banks’ agreement to swap Greek, Irish etc. bonds for fresh ones of a smaller face value and longer maturity. Such a deal would steady the markets instantly as it would diminish the aggregate burden made up, currently, by debt and potential bank losses. But, of course, it would not be enough. The second step for defusing the crisis would have to involve, as you suggest, the issue of ECB bonds or euro-bonds. However, not willy nilly, but in a manner that would respect Maastricht (to keep hawks relatively happy). How? By transferring member states’ bonds to the EU equal in value to a maximum of 60% of their GDP; i.e. by transferring onto the ECB’s books the bonds that member states have issued ‘legally’, under Maastricht. The ECB issues euro-bonds of equal value, floats them internationally and the member states, though not excused their debts, pay the much lower interest rates that the ECB will have secured in the international markets. This should stop the debt crisis in its tracks. Moreover, by invoking the 60% Maastricht limit for sovereign debt, such a move would not run against the grain of the present regime’s spirit. Thus it would be much more palatable for Germany to see it as a political price to pay which, while large, is still smaller than either letting the euro perish or continuing with the current dead end bail outs. To make it even more palatable for Germany and the rest of the austerians, in exchange for their agreement to allow the ECB to do this, the EU could agree to centralised control of member state budgets, strict limits on deficits and even a (Thatcher-style) rebate on Germany’s contribution to the Commission. Alas, all this requires someone at the helm with a minimal ability to organise an escape from a brown paper bag…
