A cheap moratorium on the stigma of eurozone debt
The EU is in a pressure cooker with interest rates that suffer from stigma, i.e. irrational fears of default that become rational and self-fulfilling because higher rates of interest imply a reward. A moratorium is one way to ease the pressure, by temporarily allowing eurozone bonds for 3 percent of GDP per annum to cover deficits. This would buy time to think through a structural solution, as a dash for a fiscal and political federation may be ill-advised given the risk of resentment.
Decision-making in the EU is currently taking place in a pressure-cooker environment, creating the risk of wrong decisions that would only make the situation worse. In the past five years, EU leaders have wandered from one crisis to the other — created in part by themselves. Now, for example, they recognize that the «voluntary default» on Greek debt was not so wise. Last week, German Chancellor Angela Merkel expressed her preference for a fiscal and political federation, though that carries risks too. The transfer of national sovereignty taking place under the current conditions of austerity and depression in southern Europe, could render the European project a diktat disliked by Europeans instead of a community that everyone welcomes. Historically Europe?s greatest danger is resentment, and such a federation may not be what is needed just now.
Current high rates of interest derive from the stigma and the key problem in the eurozone is that there is no structural mechanism yet to eliminate it and problems with interest rates are too weak an argument for a political federation.
There is a straightforward way to buy precious time to discuss structural reform with some ease: allow eurozone members to borrow 3% of GDP per annum, for the next 10 years, with full backing by the ECB. Since old debt is already in the hands of market counterparts it is not really as relevant, and only new deficits are important for the annual budgets of the member states. With the backing of the ECB the rates of interest in the eurozone could drop to an acceptable low level. Italy, Spain, Portugal and Ireland would be immediately saved and we would get a clearer picture of what can be done about Greece. After those 10 years only 30% of their GDP will be have such backing by the ECB, so that coverage would be limited and the «no bailout» condition still satisfied.
This moratorium would use euro bonds. Proponents of euro bonds generally want them structurally and not just for a moratorium. Earlier I advised against such bonds since they destroy important market information. For the purposes of this moratorium they could, however, form an instrument that everyone understands and that is immediately effective. My own structural analysis leads to the suggestion of a regime ladder, with different stages depending upon the distance from the target of 60% of debt to GDP. However, my structural analysis is only one of the many approaches. The idea of the moratorium is to create more time to evaluate all of them, also using what we have learned about how a crisis can evolve.
There is a moral hazard that some member states would take advantage of such a moratorium and not participate in the creation of a structural solution. It is more likely, however, that the whole of Europe has become more aware of the need for a structural solution. Nevertheless it would be possible to define phases, say one year for job-creation and agenda-setting, and subsequently three periods of three years for other aspects to be developed in full — say on investments, banks, governance — and a unanimous decision to be reached on whether there is sufficient progress to continue with the moratorium.
This proposed moratorium would come at a cost for Germany and Holland, as their interest rates are exceptionally low because of fears about southern Europe. Europe as a whole could ask Germany and Holland to accept normal rates of interest again to create this moratorium. Given Chancellor Merkel?s objectives and given that the «no bailout» clause is satisfied, it would be a wise decision and the best news that Europeans have heard since all this started in August 2007.
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* Thomas Colignatus is a Dutch econometrician.
