In: Blog2 Oct 2011
By: Andrea Terzi
Well, like all economists always do, let’s assume!
Let’s assume that Europeans have two goals:
1) Preventing sovereign debt defaults to avert a full-blown banking crisis; and
2) Saving the political project of the single currency that Europeans regard as a fundamental pillar of the integration process that started right after World War II.
Question: Should Europeans work towards reaching goal #2 in order to secure goal #1, or can they achieve goal #1 and then work towards goal #2?
If the euro area were already a political entity (like the United States) with a federal treasury and a central bank that acts as a market maker of treasury securities consistent with its policy rate, none of the sovereign debt problems would have occurred. Objecting that even the U.S. is not immune from a sovereign debt crisis is highly misleading: The U.S. “debt ceiling” crisis last summer was caused by a potential Congressional vote to deliberately suspend payments to private creditors of the U.S. government. By contrast, euro countries currently under pressure are very much willing to honor all their payments as they come due, but they are constrained by their status of regional entities (much like single states in the U.S.) and thus must face external funding constraints. In principle, Europeans could achieve goal #1 by first completing goal #2: Once Europeans have taken the full federation step, the sovereign debt crisis evaporates.
Because the euro area is not a political federation and is instead a union of countries that share the same currency but do not share the same treasury, the above question becomes crucial. Is a European federation, or at least some significant transfer of sovereignty from single states to a centralized EU body, a condition for achieving goal #1?
Let’s further assume that time for preventing a full-blown crisis is running out and that any sovereign transfer decisions must overcome political resistance in Europe and would take time. In that case, achieving goal #1 depends crucially on the possibility of doing it before Europe makes any progress towards goal #2. And it should be in the interest of Europeans to search and find solutions to #1 that do not require addressing #2 first.
The only effective proposal around so far, to my knowledge, that directly aims at goal #1 (and does not require political reforms) is some combination of the ECB revenue-sharing solution and the ECB acquisition of Mosler bonds. This is not an easy political sell either, yet implementation of it before Europe finds itself on the brink of collapse would be a European boon!