Issue
: Euro Zone Crisis
Should
the euro zone's debt be mutualised?
Pin-Point
SUMMARY
Prop.
By
pooling government debt, the weakest in the union are shielded from the destructive
upsurges of fear and panic.
**we
cannot properly manage a deconstruction of the euro zone. A disintegration of
the euro zone would produce huge economic, social and political upheavals in
Europe. If we want to avoid these, we have to look for strategies that move us
closer towards a budgetary union**
1. Euro-zone
governments issue debt in euros, a currency they cannot control.
2. The
previous diagnosis of a design failure of the euro zone leads us to the idea that
some form of pooling of government debt is necessary to overcome this
failure.
A. By pooling government debt, the weakest in the
union are shielded from the destructive upsurges of fear and panic that
regularly arise in the financial markets of a monetary union and that can hit
any country.
B. Those
that are strong today may become weak tomorrow, and vice versa.
3. Of
course, not any type of pooling of national debts is acceptable. The major
concern of the strong countries that are asked to join in such an arrangement
is moral
hazard—
A. that
is, the risk that those that profit from the creditworthiness of the strong
countries exploit this and lessen their efforts to reduce debts and deficits.
This moral hazard risk is the main obstacle to pooling debt in the euro zone.
B. The
second obstacle is that inevitably the strongest countries will pay a higher
interest rate on their debts as they become jointly liable for the debts of
governments with lower creditworthiness. Thus debt pooling must be designed in
such a way as to overcome these obstacles.
4. There
are three principles that should be followed in designing the right type of
debt pooling.
A. First,
it should be partial—that is, a significant part of the debt must remain the
responsibility of the national governments, so as to give them a continuing
incentive to reduce debts and deficits. Several proposals have been made to
achieve this (for example, Bruegel and the German debt redemption plan).
B. Second,
an internal transfer mechanism between the members of the pool must ensure that
the less creditworthy countries compensate (at least partially) the more
creditworthy ones.
C. Third,
a tight control mechanism on the progress of national governments in achieving
sustainable debt levels must be an essential part of debt pooling. The
Padoa-Schioppa group has recently proposed a gradual loss of control over their
national budgetary process for the breakers of budgetary rules.
5. The
euro zone is in the midst of an existential crisis that is slowly but
inexorably destroying its foundations. The only way to stop this is to convince the financial markets that the euro
zone is here to stay. A debt pooling
that satisfies the principles outlined above would give a signal to the markets
that the members of the euro zone are serious in their intention to
stick together. Without this signal the markets will not calm down and
an end of the euro is inevitable.
Opp.
The
mutualisation of the euro zone's debt to bring about the convergence of
interest rates will not, in the long run, tackle the roots of the problem.
Instead it will sow the seeds of an even larger crisis.
1. A
reckless lack of discipline in countries such as Greece and Portugal—be they
more (Greece) or less (Portugal) insolvent—was matched by the build-up
of asset bubbles in other member countries, such Spain and Ireland,
deemed merely illiquid.
A. Structural
reforms were delayed, while wages outstripped productivity growth.
B. The
consequence was a huge loss of competitiveness in the periphery, which will
not be resolved by the mutualisation of debt.
2. Debt
mutualisation can take some forms
A. Eurobonds.
B. Merge
part of the old debt
C. Activate
the euro zone's "firewall" by using the rescue funds
3. Almost
all these are bound to fail for economic or political reasons, or both.
A. The
governments of even financially strong countries cannot agree to open-ended
commitments that could endanger their own financial stability
B. And
the danger of moral hazard is always there.
4. Any
form of mutualisation involves an element of subsidy, which severely weakens
fiscal discipline:
A. the interest-rate premium on bonds of fiscally
weaker countries declines and the premium for stronger countries increases.
B. Fiscally
solid countries are punished
C. less
solid ones, in turn, are rewarded for their lack of fiscal discipline and
excess private and public consumption.
5. On top
of moral hazard, there are the political obstacles, which would be most acute
in the case of Eurobonds.
A. Germany
demands political union before Eurobonds can be considered.
B. A
quick glance at the World Bank's databank of "governance indicators"
shows that differences between euro-zone members, on everything from respect
for the rule of law to administrative capacity, are so great that political
union is unlikely to work, at least in the next couple of years.
6. The
introduction of Eurobonds would have to be backed by tight oversight of
national fiscal and economic policies.
A. But
there is no true enforcement as long as the euro-zone members remain sovereign.
B. Intervening directly in the fiscal sovereignty
of member states would require a functioning pan-European democratic
legitimacy, but we are far away from that.
C. Voters
in southern countries can at any time reject the strong conditionality demanded
by Brussels, while those of northern countries can refuse to keep paying for
the south. And either can choose to exit the euro zone.
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