EU should consider suspending debt rules, Dallara says

The European Union should consider suspending euro-area debt rules for up to two years so that growth can recover after the financial crisis, private equity executive Charles Dallara said.

Debt-cutting measures won’t boost investor confidence unless nations can boost domestic demand and reshape their economies, said Dallara, a former chief of the Institute of International Finance who helped orchestrate Greece’s 2012 debt restructuring. France, Spain and Italy need structural reforms, while Germany should pursue fiscal stimulus, Dallara said in an interview in Milan.

The euro zone needs “at least a temporary cessation for a 12- or 24-month period of efforts to bring down fiscal deficits in Europe,” Dallara said. “It’s worth considering a blanket, temporary cessation for a relatively short period to allow demand to return.”

European stock and bond markets suffered this week amid renewed doubts that economic recovery is taking hold. Italian, Greek and Spanish bond markets rallied today after the European Central Bank signaled plans to start the next phase of bond purchases soon, yet recession fears remain.

Germany this week reduced its economic-growth forecasts for 2014 and 2015. Chancellor Angela Merkel said yesterday that growth and investment can strengthen “without leaving the path of fiscal consolidation,” rebutting calls from France and Italy to consider more tailored application of EU debt rules for euro-area nations.

Debt Rules

Dallara said the debt rules aren’t helping the EU get back on track. He urged the bloc to turn its attention to bigger problems like “virtually no growth” in the major economies, average unemployment above 10 percent in the euro zone, and jobless rates exceeding 20 percent in some nations.

“It goes beyond in my view utilizing the flexibility that already exists, which is the common phrase,” Dallara said. “It goes to a recognition that we are in extremis again.”

Greece’s debt levels were slashed after a 2012 debt swap that wiped out more than 100 billion euros of privately held debt. Dallara, now executive vice chairman of Swiss private equity firm Partners Group, said the restructuring “has done very little to improve the overall medium-term outlook” for debt sustainability because Greek growth is so week.

“This is a classic case where too much fixation on short-term fiscal prospects and the debt variable” has gotten in the way of taking needed action, Dallara said. “Debt levels are still relatively high but I don’t think those pose an immediate challenge to the economic future of Europe.” [Bloomberg]

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