Opinion The Euro Zone Needs New Rules

The current Greek crisis has shown all too starkly the limits of the euro zone's sanction and support mechanisms. If the monetary union is to have a future, it needs new rules to keep members in line and bail them out if necessary.

The Parthenon in Athens: The Greek crisis has demonstrated the limitations of the Growth and Stability Pact.

The Parthenon in Athens: The Greek crisis has demonstrated the limitations of the Growth and Stability Pact.

By Peter Bofinger

Europe is in the worst crisis of the postwar era. For months, the governments of the European Union member states have proven to be incapable of developing a convincing solution for the serious debt problems of individual countries, as well as for the reduction of imbalances within the monetary union. Uncertainty among investors has grown in recent weeks, which is primarily attributable to the helplessness of political leaders, and only secondarily to the influence of speculators.

The banking crisis of the fall of 2008 demonstrated that bailout packages approved in response to market pressures fail to have the desired effect in the event of a massive crisis of confidence. At the time, it took the comprehensive approach of the Financial Market Stabilization Act to finally bring about stabilization in Germany. Today, the euro zone needs a common strategy that successfully combines sound public finances with solidarity between member states. On the one hand, the member states must be protected against the excesses of the financial markets. On the other hand, steps must be taken to ensure that the solidarity of member states doesn't undermine efforts to achieve fiscal consolidation in individual countries. In other words, what is needed is the appropriate balance of support and requirements.

A European consolidation pact should serve as the basis of the "requirements" part of the equation. It would obligate all member states to formulate a consolidation strategy designed for the medium term, which would determine, based on concrete and publicly verifiable measures, how the return to a largely balanced budget could be achieved. Instead of deficit targets, which are often difficult for politicians to monitor, spending paths and mandatory timetables for tax increases should be established and, if necessary, the criminal code for tax offences should be tightened.

The advantage of such a pact, in addition to enabling the monitoring of national commitments, would be that a coordinated approach for the euro zone would make it possible to determine the extent of the overall negative effect on demand caused by the consolidation. This would make it possible to prevent a collective over-consolidation from leading to yet another economic downturn and, ultimately, to even higher deficits. If necessary, a slower consolidation process ought to be considered for countries in a relatively strong fiscal position, so as to avoid stalling the euro-zone economy.

Common Financing Mechanism

The basis of the "support" principle should be a common financing mechanism with facilities available to all countries that abide by the measures stipulated under the consolidation pact. To avoid excessive use, funds provided by the mechanism should, as a matter of principle, be disbursed with an interest rate that is 150 basis points higher than the benchmark rate. For a country like Greece, this would represent a significant saving in terms of interest costs. If a country failed to abide by the consolidation requirements, its access to these funds, with their preferential interest rates, would be blocked immediately.

To ensure sound fiscal policy in all member states in the long term, an additional sanction mechanism would have to be incorporated into the Stability and Growth Pact. For countries that show an "excessive deficit," the community would have to be granted, in national constitutions, the possibility of adding a surcharge to the national income tax or value-added tax. The advantage of such a measure, as opposed to the sanctions currently provided for under the Stability and Growth Pact, is that it would reduce, rather than increase, an individual country's problems.

The future of the monetary union, however, depends on more than just solving the current debt crisis. An improved balance of growth is also needed, and Germany plays an important part in that respect. The fact that domestic consumption in the largest euro-zone member has been stagnant for more than a decade is a state of affairs that is unacceptable for the entire system. Anyone who sees this as a virtue must ask themselves whether Germany's export successes would have been possible if other countries had behaved as "virtuously" as we have. It says a lot about the level of the debate that such simple and fundamental insights are apparently difficult to get across in Berlin. There is no other way to explain the current approach of waiting for an upturn in exports, in the hope that that will revive our economy again. Without massive efforts on our part to create a more dynamic domestic economy in Germany, the euro zone has no future.

Anyone in Germany who still believes that losing the euro wouldn't be such a bad thing fails to recognize how important the euro zone is as a market for our industry. But Europe's future is also at stake. A failure of the monetary union would call the whole European project into question. European integration has made it possible to transform a continent devastated by wars into a place of peace and prosperity for over half a century. In other words, it's not just money that is at stake today. It's also a question of political stability in Europe.

Translated from the German by Christopher Sultan


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