The dilemma is how to unwind the high debt levels and losses in competitiveness accumulated and do this in the middle of recessions that are beginning to strain some societies to the breaking point, and in light of the overwhelming size, power, and scepticism of financial markets.
ICEC suggest the answer must involve a combination of extraordinary measures, which include institutional and fiscal-structural reforms aimed at minimising the immediate output cost of real exchange rate and fiscal adjustment, support from existing funds (the EFSF and ESM), additional support from surplus countries, voluntary debt restructuring, an exceptional role for the ECB, and exceptional emergency macroeconomic and monetary policy measures.
A recent report “Breaking the Deadlock: A Path Out of the Crisis” summarizes:
It is still possible – economically and politically – to find a way out of the euro zone crisis if policy makers separately address two problems: dealing with the legacy costs of the initially flawed design of the euro zone, and fixing the design itself. The former requires significant burden sharing and an economic strategy that focuses on stabilising the countries that are suffering from recession and capital flight. In contrast, fixing the design requires a financial (banking) union with strong euro-area institutions and a minimal fiscal backstop.
The key findings by ICEC (from NR):
The report begins:
Deepening recessions and high unemployment are tearing at the social fabric in the deficit countries and causing enormous and avoidable human suffering
– INET/ICEC
ICEC goes on:
Deepening recessions and high unemployment are tearing at the social fabric in the deficit countries and causing enormous and avoidable human suffering. Alleviating this suffering should be the first priority of euro zone policymakers.
ICEC identifies a downward economic spiral in the deficit countries also to be labelled as “deficit countries”, “debtor countries”, “crisis countries” or “south” to refer primarily to Italy and Spain. Ireland, Portugal, Greece, and Cyprus could also be considered to be in this group, but their situation is somewhat different because they are in IMF-EU supported adjustment programmes. ICEC avoid the “centre” versus “periphery” terminology that has become engrained in the last year because a country such as Italy is too central to Europe – geographically, economically, and historically – to be considered part of the “periphery”.
The deficit countries are experiencing a self fulfilling fiscal crisis as the deficiency of aggregate demand at present leaves many resources unnecessarily idle, and narrows the tax base at a time of fiscal stress.
Stabilising output and employment in the recession-struck deficit countries is impossible without delaying some of the on-going fiscal adjustment and channelling more support to the deficit countries.
ICEC have many specific recommendations for fixing the euro even without further political integration, without full fiscal union, without euro zone bonds and only limited mutualisation (Really? Is that possible? Wauw!). The recommendations have no common liability in any of the long-term proposals beyond those necessary to establish and backstop the banking union and the ESM, and both are subject to strict safeguards.
The diabolical loop between banks and sovereigns is dragging both down as each rescues the other.
– INET/ICEC
Some of these interrelated recommendations to structurally fix the euro and to put the euro zone on a firm footing include:
Some of the urgent short run measures include:
A minority of Council members believe that avoiding future crises requires changing the statute of the ECB toward a dual mandate that includes output and employment objectives, and that the price stability objective should be revised to also target nominal GDP growth.
Source: The Institute for New Economic Thinking (INET)
Patrick Artus
Global Chief Economist , NATIXIS – Banque de Financement et d’Investissement
Erik Berglof
Chief Economist and Special Adviser to the President, European Bank for Reconstruction and Development
Peter Bofinger
Professor, Universität Würzburg
Giancarlo Corsetti
Professor, University of Cambridge
Luis Garicano
Professor of Economics and Strategy, London School of Economics
Paul De Grauwe
Professor, London School of Economics and Political Science
Guillermo de la Dehesa
Chairman, Centre for Economic Policy Research (CEPR)
Lars Feld
Professor for Economic Policy, University of Freiburg
Jean-Paul Fitoussi
Professor Emeritus, Institut d’Etudes Politiques de Paris
Daniel Gros
Director, Centre for European Policy Studies (CEPS)
Kevin O’Rourke
Professor of Economic History, University of Oxford
Lucrezia Reichlin
Professor of Economics, London Business School
Hélène Rey
Professor of Economics, London Business School
Andre Sapir
Senior Fellow, Bruegel
Dennis Snower
President, Kiel Institute for the World Economy
Hans-Joachim Voth
ICREA Research Professor, Universitat Pompeu Fabra
Beatrice Weder di Mauro
Professor of Economics, Johannes Gutenberg University of Mainz
Combatting usury, ensuring ethical standards, and sweeping the world: a new financial cornerstone emerges. Islamic…
Glacial melting threatens regional water security, ecosystems, and economies. Countries must prioritise low-carbon, climate-resilient development…
A new positioning based on boldness, clarity, and perceptiveness. Moody’s Investors Service Transition to Moody's…
Russian-born activist and proponent of individual freedom in hot water, but defiant. Pavel Durov, founder…
Unlocking the transformative power of functional fitness can be fun as well as beneficial for…
Few names in the classic game’s history shine as brightly as Bobby Fischer's. From child…