Steering Clear of the Euro Precipice

It has been argued that in such circumstances, political will emerges, deus ex machina, and saves the day. But it is preferable to avoid reaching that stage.

As the crisis develops, accidents may happen that authorities find hard to control. Moreover, in some quarters of Europe, the euro’s survival is viewed as requiring a cull: its membership should be reduced to those countries with convergent economic structures and performance, notwithstanding the enormous economic and social disruption that would be unleashed, or the heavy blow to Europe’s global influence.

Given Europe’s current political balance, and taking into account its time-honored tradition of muddling through, the following stand out as minimum requirements for steering clear of the precipice:

ź A commitment to issue Eurobonds at a fixed date in the near future, as well as setting in motion the legal process for doing so. This would bring down borrowing costs for over-indebted countries and support economic activity.

ź Implementation of a Marshall Plan-type initiative to finance investment in the weaker countries. Mobilizing resources in the EU budget and significantly increasing the lending capacity of the EIB would counter the recessionary effects of austerity.

ź Relax deficit-reduction targets for countries particularly hard-hit by recession, while easing monetary policy as much as existing rules permit. Higher German inflation is part of the adjustment process.

A growing chorus of European and world opinion is pushing in the direction of more growth-oriented policies. The resistance will be strong. Time, however, is running out. The next few months are critical for the eurozone’s future.

Yannos Papantoniou was Greece’s Economy and Finance Minister from 1994 to 2001. He is currently President of the Center for Progressive Policy Research, an independent think-tank.

Copyright: Project Syndicate, 2012.www.project-syndicate.org

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