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Opinion: Save the Euro!

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There are plenty of ideas going around for how best to save the euro. But most importantly, politicians must finally tell their voters the truth: We must help the Greeks and it will be expensive -- for everybody involved.

The euro zone needs a new approach to fighting the Greek debt crisis. Zoom
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The euro zone needs a new approach to fighting the Greek debt crisis.

After over a year of futile attempts to rescue the euro, it would be difficult for even the most ardent supporters of the common currency to avoid coming to the same conclusion: The euro zone is anything but an optimal currency area.

The level of economic productivity in the 17 member countries is simply too disparate. In the core, there are booming regions like Germany, while members on the periphery are ailing and at risk of drowning in their quagmire of debt.

On top of that, the institutional structure of the currency union doesn't have the means to successfully combat a crisis. Although the European Central Bank (ECB), which is responsible for maintaining price stability in the euro zone, is one of the world's most powerful central banks, it does not answer to a single government with one finance minister. Rather, it has to deal with a tangled mess of different bodies when it comes to protecting the euro. Decisions on the common currency are made by the Eurogroup, which comprises the finance ministers of the member states, the European Union's executive, the European Commission, and, when it comes to issues of principle, the European Council, made up of the heads of state and government of all the EU members. This cocktail of competencies makes it difficult to speak with one voice.

Two Alternatives

What are the options open to the potential euro rescuers? When it comes down to it, they have two alternatives. The first one would involve shrinking the euro zone so that it consists only of countries whose economies are compatible with each other and which can afford to share a currency. The weak members would thereby be eliminated and would have to reintroduce their own currencies.

It will not come to this. But that is not because German Chancellor Angela Merkel insists that the euro-zone members will defend the currency come what may. The chancellor no longer possesses the credibility to make such a claim. No, the reason this scenario is unlikely is because its consequences would probably be much more expensive for the member states -- both the strong and the weak -- than carrying out additional rescue measures.

If Greece were to leave the euro zone, the likely consequences would be the following. The reintroduced drachma would immediately lose value against the euro. Greece's debt, which would still be denominated in euros, would therefore grow even bigger, and the country would find itself in an even bigger crisis than before. As a result, the Greek banking system would collapse. Financial institutions in other countries would also be in trouble because the Greeks would no longer be servicing their debts. On top of that, speculators would immediately start betting on which country would be next to leave the common currency.

To defend themselves against that new crisis, Greece and the remaining members of the euro zone would have to put together multibillion rescue packages to save their banks. That would involve billions in taxpayer money. But the collateral damage to the economy would be even worse. At stake would be nothing less than the European single market, the basis for economic success and prosperity in Europe, including a number of euro-zone members like Germany who are currently faring well. The euro-zone members will not be prepared to pay this price, and neither should they.

Evening Out Differences

Against that backdrop, the euro-zone members have little choice but to go with the second alternative. They have to try to even out the different levels of productivity in the euro zone, so that the members fit better together. There are three ways they can try to do this:

  • The weak states on the periphery would have to reform their ailing public finances and economies in order to catch up with their more powerful partners.
  • The differences could be balanced out using money, turning the European Union into a so-called transfer union.
  • A mixture of the above two approaches.

The latter approach is the most likely. It is the course that the euro-zone countries have already been taking. The three main debt-stricken countries -- Greece, Portugal and Ireland -- have enacted comprehensive reform programs in a bid to bring their public finances back into balance and make their economies competitive. Because those countries can only raise money on the capital markets by paying high interest rates, the countries in the rest of the euro zone, together with the International Monetary Fund, have been lending them money.

Capping the Aid

The hope that the aid payments would only be required to bridge a temporary financial squeeze has proved illusory. Greece's aid package looks set to be doubled and extended. The introduction of a permanent rescue mechanism in 2013 means that the aid will effectively be guaranteed for all eternity.

Now the key thing is to cap the transfer payments. Arbitrary upper limits do not help much -- the experience with Greece shows that such limits are simply raised when necessary. A more promising approach would be to slash the financing requirements at their root. For Greece, it seems inevitable that much of its debt will have to be written off. The country has a public debt equal to nearly 160 percent of its gross domestic product. If it was relieved of half of that, the debt would be left at a completely viable level, one that would be in the middle of the range in comparison to other European countries. Of course, the banks, which still hold the largest share of Greek debt, would have to be protected against such a haircut -- with billions in aid.

That would not be the end of the story, though. A debt restructuring would not do anything for the future economic recovery of the country. Greece would therefore have to keep pushing forward with reforms, in other words: liberalization, flexibilization and privatization. This will be painful for all concerned, but it is inescapable. Only then can the semi-socialist economic and social structures in the battered country be overcome. It is the only way to turn Greece into an attractive location for foreign investment. It may, however, take a while for the reforms to pay off.

The euro rescuers should absolutely resist the temptation to launch an investment program for the peripheral states, as many people are calling for, in a bid to promote economic growth in those countries. Experience with the reconstruction of the former Eastern Germany after German reunification in 1990 shows that such measures only serve to literally cement economic disparities.

Muddling Through

Based on this analysis, what should the economic firefighters in Brussels and other European capitals do? The answer is that they should continue with their current course of improvisation and muddling through -- but do it better than before.

As a first step, they should dispel the taboos that impede clear thinking. That applies in particular to Chancellor Merkel, whose public rhetoric currently alternates between insulting the Greeks and indulging them. She should admit to herself, and to the general public, that the rescue efforts will take much longer than originally planned and will end up being more expensive. She should explain to her voters that the billions of euros that are being made available are not handouts to lazy southern Europeans, but are more akin to an insurance premium to secure Germany's economic well-being.

Another taboo also needs to fall. The crisis shows that the euro zone really needs something like an economic government. Improved economic and fiscal oversight of the member states and a more rigorous Stability and Growth Pact are good ideas and a step in the right direction, as was the introduction of a chairman for the Eurogroup a few years ago. But this is just the beginning. What is needed is a double-whammy approach, if you will, combining closer cooperation with improved coordination. There is no way around the fact that the euro-zone members will have to give up even more of their sovereignty in the process.

This week's EU summit in Brussels would be a good opportunity to reset the euro zone's approach to fighting the crisis. The chances of the about-turn happening there are slim, though -- but it will have to happen sooner or later.

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1. Economic Growth
PHOEVOS 06/23/2011
Eventhough reformation of the Greek state is important, the true path of exiting the crisis points to intelligent new investment and development of natural resources. Greece, together with Cyprus and Israel have enough natural gas and methane hydrate resources to replace the declining inventories of the North Sea. These are European assets and can augment EU energy security. Therefore, let's pause this austerity driven craze - which quite frankly has reached its limits - and let's transform Greece into an EU energy hub of renewables and conventional energy resources available for European consumption. For such we need a truly European effort.
2. Why?
heraldmage 06/23/2011
The EU and its currency was established to enable trade & transfer of funds between European nations. The industrialized nation have always taken advantage of nations whose wealth is derived primarily agrarian & tourism. The EU was a means to modernize the feudal system while making it competitive in the market place against the USA. Yes by introducing a European currency it standardized the value of workers and wages between nations and opened the borders allowing worker movement to areas in need. The EU / euro was marketed as worker friendly but in reality the only real beneficiaries are the privileged & their corporate identities. Why should the people be forced back to serfdom of the Middle & Dark Ages because of debt incurred by a corrupt government to support the privileged and to assure & preserve corporate profitability? In the 20th century the oligarchy tried to take ownership of all South American public utilities through the corruption of government officials. The peoples' revolution ended the privatization of utilities and started the continent wide move back to democracy & nationalization of natural resources. The new ploy to gain ownership of public utilities, buildings & lands is through bail out plans that require the privatization of public assets or as collateral for unpayable government debt. The privileged in Greece and other debtor nations continue to live in comfort unaffected by the dire economic conditions. Meanwhile the majority of the population sink further into poverty with levels approaching that of developed nations. Maybe it's time for the people to assert their power. Use the electoral process replace the privileged (old & new money) with independent legislators who represent the people not corporation & the privileged. Why not use the power of peaceful protest to demand a debt reset not by 50% but why not 100%? Banks, investment firms, corporations & the privileged have been posting record profits for the past decade & throughout the economic disaster, Instead of using taxpayer funded bail outs to jump start the economy it was hoarded away & paid as bonus to the architects of the economic downturn. A worldwide debt reset, not just government debt but all debt, would lessen the impact of default in our current system putting everyone on an equal playing field as far as debt is concerned. Once the debt crisis is over the people can determine which economic policy fits the needs of the nation as a whole. Privatization / Capitalism - the privileged own & control everything. Wages taxed to fund social services & military. Education.& health care paid by individual. Nationalization / Socialism - natural resources & associated industries owned by people profits fund social services, health care, education, infrastructure, military and food & housing stipend. Or the new modern economic policy a combination of Nationalization / Privatization - people own natural resources and majority share of public / private owned associated industries as well as privately owned corporations- profits from public held industry support need of people & government private corporation taxed. The privileged still benefit just not as much as they did under capitalism. The privileged and their corporate identities are out of control in their lust for power & greed. They are willing to do anything to gain more power & wealth without regard to the harm they cause the population or the world. While they control the wealth they are far from the majority. So save the euro if you want but not to support the profits of the privileged but to build a better world for all the people. Yes some deprogramming of decades of propaganda will be required for many, but when they are allowed to see the benefits enjoyed by those already living under the public / private economic system where long term debt is discouraged they will be converted. Of course under a truly democratic system it can always be changed.
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