Europe needs big bang to put some life into its economy
By Phillip Souta
An economic big bang is the best way for European policy makers to restore confidence in their ailing markets. Yet the obdurate approach of some national executives to this policy puts its chances of success in doubt.
The German parliament’s ratification of much-debated European Financial Securities Framework (EFSF) legislation was clearly a positive moment for policy makers interested in Europe’s future economic well-being. Combined with the earlier ruling by Germany’s constitutional court, it means that legal challenges to the country’s role in bailouts are effectively a thing of the past, as long as the fund requires no further topping up.
Of course, the significance of this victory for eurozone solidarity must not be overstated. Other national parliaments have so far proved more rebellious than the Bundestag; Slovakian deputies, pointing out that their economy was smaller than that of Greece, refused to pass their own EFSF bill putting the entire project in jeopardy.
Assuming, however, that either Slovakia does eventually pass its law in some form or – more likely given the relatively small size of Slovakia’s contribution – eurozone members find a way around making Slovakia pay, there remains another problem with the EFSF in its current form; it is not sufficiently large to both bailout Greece and stave off contagion in other member states.
In response, the EU, national executives and the IMF need to take drastic measures to show that they are four-square behind the euro. A ‘Big Bang’ plan, reported to have been under discussion during a recent IMF meeting in Washington, would be the best way to demonstrate their resolve.
In purely economic terms, the plan is a sensible one – it foresees the implementation of three distinct policies to deal with the Greek sovereign debt crisis and its potential fallout.
Firstly, Greece would finally be allowed to default within the euro through a 50% haircut. Debts accrued through the issuing of government bonds would become manageable for the executive there, meaning that external actors – the IMF and the EU, for example – would be able to leave Greece to reconstruct its economy without ever-increasing pressure from markets.
Secondly, to minimize the risk of contagion from Greece affecting other markets, the remaining EFSF money – currently standing at some €250 billion – would be leveraged either through turning the fund into an insurer or, perhaps more likely, into a bank.
Clearly, this would be a bold step towards the establishment of common monetary policy, given that both the EFSF-bank and the EFSF-insurer options would require underwriting by the European Central Bank, meaning that ultimately they would need to be backed themselves. Nonetheless, it would allow the fund’s ceiling to be extended to some €2 trillion – more than enough to deal with current eurozone problems.
Finally, French and German banks exposed in Greece would be recapitalized with a massive injection of cash from their governments – a move which would not only keep these banks afloat but would give them the extra liquidity required to help jumpstart Europe’s stalled economies through increased lending.
Not all member states have been happy with this final action point; the French government has attempted to mitigate the risk of it having to bailout its own banks due to fears that such a move would endanger its own triple-A credit rating. At the same time, it is difficult to gauge the appetite of the German public for funding another bailout although at least this time they will be giving money to their own banks.
National executives will evidently be taking a calculated risk on the Big Bang rescue scheme. Yet it is clearly preferable to the available alternatives, most of which involve either continuing to pour money into Greece (which may not be possible, given how vocal opposition has been thus far) or allowing the country to default completely, potentially exposing themselves to a catastrophic economic fallout.
The Big Bang theory avoids these two extremes – putting a final price tag on buying the eurozone out of its economic malaise. It is up to governments to make sure they take this chance.
