BRUSSELS, Dec 2, 2010 (AFP)
The eurozone debt crisis is driving radical ideas of how the euro project can be kept safe in the face of the clear failure of unprecedented measures, including Ireland’s bailout, to tame the storm.
An 85-billion-euro (113-billion-dollar) rescue for Dublin agreed at the weekend was supposed to calm the financial markets decisively — instead it provided only a blip of relief before fellow strugglers Portugal and then Spain came under intense pressure from sceptical investors.
In May, a 110-billion-euro package for Greece was supposed to do the trick and it was followed by a trillion-dollar joint backstop facility with the International Monetary Fund but some now think that might not even be enough if Spain, the fourth largest eurozone economy, were to need help.
What is the answer? Radical action to fix the problem at the very heart of the euro which is based on a monetary union but does not have the wider political union to back it up and make it effective, say analysts.
“Nowhere else in the world do you find a shared currency without a shared government,” former Belgian prime minister Guy Verhofstadt said in Belgian daily Le Soir.
“The euro cannot survive if it must continue to go up against the 16 (eurozone) governments,” Verhofstadt said, calling for powers to be transferred from member states to set up a real, central European economic authority.
For Verhofstadt, also a Euro MP, that should lead to a “single market for euro bonds,” a radical departure that makes many uncomfortable at the loss of sovereign control over a key attribute of national finance — the right to borrow.
At the same time, others such as Germany, Europe’s biggest and strongest economy, also baulk at the prospect. Berlin currently enjoys the cheapest finance costs on the market but if its bonds are lumped in with those of weaker eurozone members, then rates must inevitably rise to reflect the increased risk.
If that option is ruled out, then some suggest that what is needed is a permanent rescue mechanism that would function automatically to stabilse a debt-strapped eurozone country and restore its finances to health.
“The truth, however, is that a monetary union can only survive if there is a willingness to provide mutual financial assistance in times of crisis. No monetary union can survive without such a solidarity mechanism,” Belgian economist Paul De Grauwe said.
“Financial solidarity is deemed politically unacceptable in a number of countries,” de Grauwe said in a recent paper where he argued for the setting up of a European Monetary Fund — a counterpart to the IMF with a similar role.
There has been much discussion recently as the Irish crisis came to head about setting up such a mechanism after the the EU-IMF trillion dollar facility expires in 2013 but opinions differ widely on how it should be done.
The idea is that an EMF would sanction member states which break eurozone fiscal rules, helping those in need to return to the fold with financial aid or a restructuring of their debts, if that is needed.
For economist Daniel Gros, “it continues to be necessary to put this Fund in place” but it has to come second to fighting the immediate crisis.
“The crisis is so near that we have to tackle that first,” Gros said, suggesting that any necessary debt restructuring needs to take place right away “or that the European Central Bank intervenes and buys the debt of all the countries concerned.”
Another Belgian economist, Bernard Delbecque, took a similar view in business daily L’Echo, urging European Union leaders to “come together” in a bid to remove the “sword of Damocles” hanging over the eurozone.