The euro zone crisis is everywhere. Everybody is talking about it. Yet there is no clearsolution: It is a many-sided problem that includes financial, economic, and political aspects. The idea of pumping more money into a bailout fund for the “troublemakers” seems unrealistic. But this raises a number of questions: Will the euro survive? Should the euro zone break up in two? Should problematic countries leave temporarily and return once they are ready?
The story begins in Greece, which is where some people think it ends as well. I think this view is too simplistic: As I have mentioned in previous blog entries on the euro and the fiscal crisis, I believe the true long-term response is to keep the euro rather than leave it. As I said in a recent interview, Greece should fight to stay in the Eurozone even if it defaults on it debt. Greece would do better to struggle through a default (or whatever it will be called) rather than go back to the drachma. Montenegro has been using the euro ever since the currency was introduced in 2002, albeit without a formal agreement with European Central Bank. (Before the euro, Montenegro used the Deutsche mark as its legal tender). Although our government has had to give up most of its monetary policy instruments, I reckon it is always better to keep yourself linked to a strong currency.
Such an approach forces a country to confront all problems including the shadow economy, privatization-related issues and structural changes. My position is that you need an anchor for your economic policies, and therefore pay closer attention to how you stimulate entrepreneurship, which is the motor of economic dynamism and competition. One has to take greater care in cutting red tape and tackling sources of corruption while investing more in the rule of law.
Imagine what would happen if one of the United States were to go bankrupt. Would the USA abandon the dollar? I doubt it. Imagine if we were in Germany 15 years ago and one of Germany’s states went bankrupt. Would Germany have given up the Deutsche mark? Again, I do not think so. So if some of the countries in the euro zone go bankrupt, why should the euro disappear? It is true that the strength of the euro currency has highlighted structural discrepancies among the members of the club – discrepancies that were masked prior to the crisis. But still, the disadvantages of breaking up the euro zone would be enormous compared to the advantages that the euro brings. A breakup would bring much bigger economic costs. So if Greece defaults, but continues to use the euro, it should be possible for the country to rejoin the single currency as a full member once it revamps its economy.
I believe EU leaders will not let the sovereign-debt crisis damage the euro, but they need to do more. It is difficult to resist thinking about the contents of the recently floated proposals to establish common economic governance. Can they solve the problem by issuing a new type of Eurobond? They might. Is it harmful to have friction within the ECB? Of course it is. It is quite reasonable to expect that when talking about economic governance there is more to be done in relation to the fiscal policies. Will there be a single finance ministry, or a uniform tax system? Time will tell. However, I am not sure it is realistic, or even necessary for this to be installed to the extent that some people argue.
At present, some argue that it might be useful to harmonize the VAT system or excise policy throughout the EU. I would agree. Still, I do not think that the same should be done with respect to personal and corporate income taxes, or real-estate taxes. While the former could bolster the single market, the latter may harm structural competitiveness.
Rather than a finance ministry, I would argue for a Treasury department (or similar office) that would work alongside Ecofin, the council of finance and economy ministers from EU member states. This department would be in charge of the Eurobond issues. The office would assess the financing needs of the euro zone members as a whole and auction bonds as a single entity, replacing the existing system in which bonds are issued by individual member states. Strong economies such as Germany would lend their economic productivity and reputation to the project. Investors would always have a healthy appetite for these securities. At the outset, the interest rates might be somewhat higher than the rates paid on the Bund, which would clearly mean higher costs for taxpayers in Germany and other solid economies. I believe that one is easier to deal with than the one related to the new funds and budget allocation, which is politically unacceptable. Later on, as the EU economy recovers, the interest rates would converge to the current Bund levels, as there must be triggers for the non-performers to use the money.
The EC Treasury could impose conditions on the countries that do not follow policy prescriptions checked by the EC or the IMF before money gets disbursed in order to prevent the guarantees to be called some day.
Such a scheme could appease the markets and provide a solid maneuvering space for countries that may default, without imposing significant new costs on the strong economies.