Blog Post

A summer to-do list for European leaders

At their meeting last week, European leaders agreed again to “do whatever is necessary to ensure the financial stability of the euro area as a whole”. But they did not say how. Even if Wednesday’s vote in Greece’s parliament averts an immediate crisis, they would be well advised to make use of the long European […]

By: Date: June 27, 2011 Topic: European Macroeconomics & Governance

At their meeting last week, European leaders agreed again to “do whatever is necessary to ensure the financial stability of the euro area as a whole”. But they did not say how. Even if Wednesday’s vote in Greece’s parliament averts an immediate crisis, they would be well advised to make use of the long European summer season to turn this unspecified commitment into an action plan. Here are some modest suggestions for their holiday homework:

1. Complete the banking sector clean-up. Financial fragility is heightened by the still-unfinished recapitalisation of the weaker banks. Two years after the US successfully completed its stress tests, Europe is still struggling. The publication of new tests, expected in July, offers a chance to aggressively restore the soundness of banks across Europe.  This may cost public money and political capital, but no political expediency can justify missing the opportunity.

2. Explore options to address insolvency. Last week, the German proposal for a compulsory rescheduling of Greek debt was rejected. But to pretend that an insolvent country will repay its debt is no strategy.  There are only two economically consistent options. One, call it Plan A, is to socialise the Greek debt. It requires lowering the interest rate on official assistance to a level that makes Greece solvent and deciding who, if needed, will bear the corresponding cost – either the banks, through a special levy or, by default, the ordinary taxpayers. Plan B is to make private creditors pay through an orderly restructuring. To make it a viable option, preparations must be undertaken, not least by the ECB, so that when restructuring takes place its financial fallout can be contained. Each plan is anathema to some of the leaders, but one will eventually have to be chosen. The Europeans should make use of the time they have bought to evaluate their implications and choose a strategy.    

3. Make better use of the crisis management facility. The recently created European Financial Stability Facility (EFSF) and its successor the European Stability Mechanism (ESM) are potentially powerful instruments to preserve financial stability. But lack of trust and domestic politics have led to attaching too many strings to their use. As they stand they can neither serve to prevent a crisis through precautionary lending nor to resolve it by serving as a backstop to debt restructuring. This is a waste of scarce resources. The EFSF/ESM should be turned into a more flexible instrument to help preserve financial stability.  

4. Devise an adjustment and growth strategy for southern Europe. Fiscal consolidation is of paramount importance but ultimately, what will matter most is whether southern Europe can return to growth. So far the joint European Union and International Monetary Fund programmes have, with some success, focused on the fiscal front. But unlike Ireland, southern Europe has not started reducing the real exchange rate misalignment resulting from a decade of excessive inflation, and growth prospects remain remote. The EU should now move on this front. A first and simple step should be to make better use of the money it spends in Greece and Portugal. Both countries are major beneficiaries of structural transfers, but EU money is both under-spent and badly spent (because guidelines set long ago are at odds with current priorities). The EU should pass special legislation to speed up the disbursement of aid and, as long as assistance programmes are in place, allocate it to supporting their growth component.
    
5. Address the underlying weaknesses of the euro area. Euro area surveillance reform, about to be completed, will help diminish the risk of future crises. But nothing has been done to remedy the lethal correlation of banking and sovereign crises. Sovereigns should be better protected against the failure of their banks, through the centralisation of supervision and the creation of an insurance scheme akin to the US Federal Deposit Insurance Corporation. By the same token banks should be better protected against the failure of their sovereigns, through diversification of their bond portfolio. Today, any meaningful restructuring of the Greek debt would wipe out the capital of the Greek banks. As long as this concentration of risk persists, sovereign restructuring will remain more dangerous that it needs to be. This is the most potent justification for introducing Eurobonds, because they would offer a natural diversification instrument.

Throughout the crisis the European leaders have consistently demonstrated a strong commitment to the euro. But as Winston Churchill once said of the US, they can be trusted to do the right thing only after having exhausted all other possibilities. This behaviour is too costly to be sustained. The leaders should now move ahead of the curve and take initiatives.

A version of this op-ed was published in the Financial Times on 28th June 2011


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read article
 

Blog Post

Will European Union recovery spending be enough to fill digital investment gaps?

The recovery facility will boost digital transformation, but questions remain whether it will be sufficient to achieve Europe’s digital ambitions.

By: Zsolt Darvas, J. Scott Marcus and Alkiviadis Tzaras Topic: European Macroeconomics & Governance, Innovation & Competition Policy Date: July 20, 2021
Read about event More on this topic
 

Upcoming Event

Sep
1
12:30

The EU recovery fund - state of play and outlook

Bruegel Annual Meetings, Day 1- In this session we will discuss the EU recovery fund, its state of play and outlook.

Speakers: Nadia Calviño, Karolina Ekholm and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event More on this topic
 

Upcoming Event

Sep
2
10:00

Conversation on the recovery programmes

Bruegel Annual Meetings, Day 2- In this session, we discuss the recovery programmes.

Speakers: Maria Demertzis, Henry Foy and Tadeusz Kościński Topic: European Macroeconomics & Governance Location: Palais des Academies, Rue Ducale 1
Read about event
 

Upcoming Event

Sep
2
13:00

European banks: under global competitive pressure?

Bruegel Annual Meetings, Day 2 - European banks have lost stature and remain generally low-profitability, low-valuation in comparison to their global peers. Is that a problem? If so, what can EU policymakers do to address it?

Speakers: José Antonio Álvarez Álvarez, Mairead McGuinness and Nicolas Véron Topic: European Macroeconomics & Governance, Finance & Financial Regulation Location: Palais des Academies, Rue Ducale 1
Read about event More on this topic
 

Upcoming Event

Sep
2
15:45

Blending physical and virtual: shaping the new workplace

Bruegel Annual Meetings, Day 2 - This panel will cover the changes the COVID-19 pandemic made to our workplaces, and what to expect in the near future.

Speakers: Nicholas Bloom, Michael Froman, Mario Mariniello, Sara Matthieu and Luca Visentini Topic: European Macroeconomics & Governance Location: Academy Palace
Read about event More on this topic
 

Upcoming Event

Sep
3
09:00

The role of the EU's trade strategy for an inclusive and sustainable recovery

Bruegel Annual Meetings, Day 3 - We are delighted to welcome Valdis Dombrovskis, Executive Vice President of the European Commission for An Economy that Works for People to talk about Europe's trade strategy.

Speakers: Valdis Dombrovskis, Alicia García-Herrero and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Palais des Academies, Rue Ducale 1
Read about event More on this topic
 

Upcoming Event

Sep
3
10:15

Conference on the Future of Europe: envisioning EU citizens engagement

Bruegel Annual Meetings, Day 3 - Panellists will discuss different options and what they may entail while revisiting the debates on the future of Europe at national and EU-level that have been conducted thus far.

Speakers: Caroline de Gruyter, Kalypso Nicolaïdis, Niclas Poitiers and György Szapáry Topic: European Macroeconomics & Governance Location: Palais des Academies, Rue Ducale 1
Read article Download PDF
 

Policy Contribution

A new direction for the European Union’s half-hearted semiconductor strategy

The EU needs a more targeted strategy to increase its presence in this strategic and thriving sector, building on its existing strengths, while accommodating its relatively low domestic needs.

By: Niclas Poitiers and Pauline Weil Topic: European Macroeconomics & Governance, Innovation & Competition Policy Date: July 15, 2021
Read article More by this author
 

Blog Post

Fit for 55 marks Europe’s climate moment of truth

With Fit for 55, Europe is the global first mover in turning a long-term net-zero goal into real-world policies, marking the entry of climate policy into the daily life of all citizens and businesses.

By: Simone Tagliapietra Topic: Energy & Climate, European Macroeconomics & Governance Date: July 14, 2021
Read article More on this topic
 

Blog Post

Fair vaccine access is a goal Europe cannot afford to miss – July update

European countries must do more to tackle the vaccine uptake gap. Vaccination data should be published at the maximum granularity level so researchers and local decision-makers can monitor progress.

By: Lionel Guetta-Jeanrenaud and Mario Mariniello Topic: European Macroeconomics & Governance Date: July 14, 2021
Read article More by this author
 

Blog Post

SPACs in the gap

Special-purpose acquisition vehicles could fill a gap in European equity markets and lure risk-averse investors off the sidelines.

By: Rebecca Christie Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: July 13, 2021
Read article More on this topic
 

Blog Post

A breakdown of EU countries’ post-pandemic green spending plans

An analysis of European Union countries’ recovery plans shows widely differing green spending priorities.

By: Klaas Lenaerts and Simone Tagliapietra Topic: European Macroeconomics & Governance Date: July 8, 2021
Load more posts