Resolving the Eurozone Crisis

 A debt transfer of up to 60% would stabilise the crisis. But it should be to Eurobonds held by the ECB rather than an untried new institution and does not need either buy-outs or national guarantees .

1. The Eurozone is in a Gordian knot on debt. The ECB has just raised interest rates to 1.25% which look low. But it has been offloading lending to the debt exposed periphery to the EFSF whose rates have been as high as 6% and now could rise further. With rating agencies reducing sovereign debt to junk status, private sector flows to governments have stalled. Spain’s public sector debt is sustainable but its private sector exposure - especially in unsold housing - is near half a trillion euros. The EFSF is not designed to cope with this.

2. The Brueghel Institute has proposed a transfer of national debt up to 60% of GDP to Eurobonds. This would be sustainable both because EU debt since last May’s buy-outs is near nil, at less than one per cent of GDP, and because it would lower interest rates. But the Brueghel proposal is for debt buy-outs, with national guarantees, which imply the fiscal transfers to which countries such as Germany are opposed, and risks challenge by the German Constitutional Court. It also recommends a new agency, which could need a Treaty change.

3. A debt transfer of up to 60% would stabilise the crisis. But it should be to Eurobonds held by the ECB rather than an untried new institution and does not need either buy-outs or national guarantees. The Roosevelt New Deal shifted savings into investments through US Treasury Bonds. But it did not require California or Delaware to guarantee them, nor bought out a share of their debt. US Treasuries do not count on the debt of the states of the American Union, nor need Eurobonds count on the debt of member states of the EU.

4. A debt transfer to the ECB does not need Treaty changes. The Lisbon Treaty empowers the European Council to require the ECB ‘to support the general economic policies of the Union’. This must be ‘without prejudice to price stability’ and inflation is rising. But inflation is global, due to demand for commodities in the emerging economies. It also is fuelled by speculation on commodity markets, which should be addressed globally by the G20, as Nicolas Sarkozy has argued. Rather than inflationary, a debt transfer to the ECB would be inflation neutral.

5. Nor does a debt transfer need fiscal transfers. The member states would service their share of the transferred debt, at lower rates, not German taxpayers. But stabilisation of the debt crisis, and the current political cisis, also needs matching by growth. This could be financed by net issues of Eurobonds by the ECB which would attract surpluses from the central banks of emerging economies and sovereign wealth funds which want to diversify their foreign currency holdings. These could co-finance investments by the EIB and be serviced by revenues from them, while such recycling of surpluses into a European recovery would contribute to the more balanced growth of the global economy which is a main aim of the G20.

6. Would this challenge the SGP?  Yes, but to deliver both stability and growth rather than only austerity. It also would make it more credible to bond markets. The tranche transfer would reduce sovereign debt to within the SGP 60% national limits for all member states other than Greece, but whose reduction of remaining excess debt then would become manageable. The ECB would remain the guardian of stability but the EIB would safeguard growth by investments in the cohesion areas which already have been remitted to it by the European Council of health, education, urban renewal, the environment and new technologies. 

Stuart Holland

Formerly adviser on European affairs to Harold Wilson, Jacques Delors and Antonio Guterres. Currently Visiting Professor in the Faculty of Economics of the University of Coimbra. His new book "Europe in Question – and what to do about it" is published as an eBook by Spokesman Press and available on Amazon.