Bill Emmott - International Author & Adviser


Lifesaving medicine for the Euro
La Stampa - December 8th 2011

Sadly, one good day will not save the euro, and neither will pious promises to behave better in the future. For sure, Italy´s austerity plan and the Franco-German proposals for fiscal union represent progress. But there is much more to be done.

            As the President of the Council has said, Italy has played its part, but only its first part. The most vital part, liberalising measures to release the country´s undoubted energies for enterprise and growth, have still to come. Also, however, the euro needs to survive to make those measures possible and effective.

            Will it? Yes, that looks likelier today than it did a week ago. But in a week or two´s time it could look bleak again. For these proposals for a fiscal union, or a "stability union" as the Germans like to say, are in truth only a promise to not repeat this crisis in the future. They are like taking a heart-attack patient into intensive care and just lecturing him about how to avoid the next heart attack. This does nothing to help him survive the present one.

            Some better medicine will come in the short term if the European Central Bank now concludes that with the promised fiscal union, it is now safe for it to buy much larger quantities of Italian and Spanish bonds. But that will provide only temporary help, like a life-support machine. It will not make the patient healthier.

            The euro´s sickness comes, first of all, from the unsustainable combination of huge debts and slow or negative economic growth in Greece, Italy, Spain, Portugal and, until recently, Ireland. But it also comes from two other things. One is the clear acceptance, even among eurozone political leaders, that Greece needs a big discount on its debts, probably even bigger than the one already agreed. This casts doubt on the riskiness of other countries´ debts too. The second is the deep division within the eurozone governments about whether the monetary union should involve just fiscal rules or whether it must also involve some collective responsibility for sovereign debts.

            On the basis of what has been announced so far, Germany is sticking resolutely to its position that the euro must be a system only of rules, and never of collective liability. That is a logical and legitimate decision, but it leaves a lot of questions. Why should the rules be credible this time? A treaty, automatic sanctions and the European Court of Justice sound impressive, but it is not obvious that they will work better than the old Stability and Growth Pact that Germany itself flouted in 2002-03. And automatic sanctions will just punish countries that are already in economic trouble, so why will this be effective?  They might just produce a new crisis.

            The next question is whether the proposed fiscal rules actually solve the real problem. If Europe had had these rules and strict enforcement when the currency was launched in 1999 then, certainly, Italy, Greece and Belgium would not have been allowed to join the euro. But Ireland, Spain and even France and Germany, all of which now have debts far higher than the rules "allow", thanks to the economic crisis of 2008-10, would now be being punished. for what purpose?

             if these rules had applied during 2008-10, the European slump would have been even deeper, as governments would have been forbidden from counteracting the collapse of private demand through fiscal support. Or if the rules would have been waived, what would that have done to their credibility?

            There is also the crucial issue of how the eurozone moves credibly from where it is today, with many countries holding public debts of 100%+ of GDP, to the new Utopia of 3% of GDP budget deficits and 60% of GDP public debt ratios. To use an aviation metaphor, the "glide path" to that future state will play a vital part in building credibility. And inevitably that path, and the treaty itself, will take a long time to negotiate and implement.

            This leaves still an urgent need for longer-term life-saving medicine for the sick euro patient. It looks to this observer that this has to mean two dramatic interventions. The first is an intervention to distinguish Greece from the other highly indebted countries, once and for all. The failure to establish that distinction, both through national policies and eurozone policies, is what sent Italian bond yields up past 7%. The clearest way for this to be done is also a risky way: to expel Greece from the euro.

            The other necessary life-saving medicine is some form of collective guarantee for sovereign debts, or at least a portion of them. With fiscal union on the way, and Greece on its way out, it would be possible for Germany to drop its previous veto on this development. It may be planning to do so anyway, perhaps with a strict time limit for the guarantee, tied to reform programmes and fiscal austerity. Eurozone credit ratings are going to be cut anyway, so that is no longer a good argument against such collectivisation. As and when this happens, it will finally be safe to say that the euro will survive.




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