An Essay by Michael Sauga
The 700 billion bailout fund created by European leaders for the euro zone last week may be sufficient to protect Greece, Ireland and Portugal from having to admit complete failure. But if Spain and Italy run into trouble, the fund will have to be expanded to such an extent that it will become too heavy a burden for those contributing to it. Germany and France, as the most important financiers of the euro zone, might even find themselves having to beg for money.
Besides, it's a known fact in economic life that both a bankruptcy and the postponement of a bankruptcy can generate costs. When applied to the euro crisis, this means that there is a point at which delaying the bankruptcy of the European community of nations becomes more costly than an orderly insolvency of its most delinquent borrowers. There are reasons to suggest that this point could soon be reached:
Of course, more is needed to make such a crisis concept a success than merely the goodwill of governments. Europe has to set priorities. Measures to overcome the debt crisis are the most urgent. If a country can no longer service its loans, banks and other financial institutions must also make sacrifices, and must do so regularly and not on a case-by-case basis, as called for under the summit resolutions.
The politics of symbolism to support the European cause is unnecessary. The community doesn't need an overinflated economic government or an empty competition pact, nor does it need Europe-wide rules dictating retirement ages or a Brussels commission to harmonize gross income levels.
What is urgently needed, however, is an institution to monitor Europe's debtor nations, provide assistance in times of need, implement austerity programs and, if necessary, restructure debt. What is needed is a European monetary fund, paid for by the members of the euro zone and as free from the influence of governments as possible.
Such an institution would benefit Europe more than an instrument to manage credit crises. The fund would be a symbol. It would show that private lenders are involved in the consequences of a crash and that politicians cannot shift their responsibility to Brussels. In the future, it would become clear once again that there is a relationship between risk and return, and that decisions on budgets, taxes and debt are made by the institutions with the democratic authority to do so: the national governments.
This would also be in keeping with the writings of Robert Mundell, whose 50-year-old essay might still be used to support the theory that the common currency requires a political union. Ironically, Mundell never supported such a position. On the contrary, in his essay he writes specifically that a monetary union can also function within a confederation of states if labor and capital, as well as wages and prices, are only adequately flexible. For this reason, the question of whether the euro can survive cannot be decided in an abstract way. It is, as Mundell wrote in typically academic language, "an empirical question."
Translated from the German by Christopher Sultan
---Quote (Originally by sysop)--- In the battle to save its*common currency, Europe is*too busy*focusing on the*same old*failed policies. Rather than set aside ever higher sums for bailouts, the bloc needs to set up an [...] more...
The key to this whole story about the Euro zone and the rescue packages is: the banks are doing better. Kind of reminds of the US, where "the rich" and "the banks" are likewise doing fine after trillion [...] more...
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