IN Europe, they don’t like to talk about Plan B’s.
As the European sovereign debt crisis enters its fourth year, the region’s policy makers are sticking with a familiar playbook. Their crisis response moves in fits and starts as compromises are struck between the most powerful countries in the euro zone. Then, aid is typically granted only if the recipients adopt policies that often lead to protracted economic pain.
Some fresh initiatives have recently occurred, like the European Central Bank’s commitment in September to stop government borrowing costs from rising too far. And Europe’s leaders talk about one day forming a fiscal and political union.
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Interactive Feature: Tracking Europe’s Debt CrisisFor the most part, Europe has avoided radical solutions, and there are good reasons for the piecemeal approach. Adventurous policies could backfire badly. They could prompt even more economic pain, and open even wider rifts between the countries that make up the euro zone.
But a combination of fear and competing ideals may also be preventing Europe from thinking too far outside the box. Policy makers seem to bow to three sacrosanct objectives. First, no country can drop out of the euro zone. Second, everything must be done to avoid using write-downs to reduce government indebtedness. Third, any European country receiving aid must agree to tough terms, accepting austerity and a loss of national independence in the process.
“They still seem to be favoring the ad hoc measures, unfortunately,” said Raoul Ruparel, head of economic research at Open Europe, a research group that believes the European Union needs to be more transparent and accountable. “They are still short of some sort of big leap.”
Yannis Behrakis/ReutersEXPRESSING SOLIDARITY Anti-austerity advocates march in Athens.
Yet Europe may eventually need to take more drastic action.
Most of the region’s economies show few signs of producing robust growth any time soon. This means unemployment in the euro zone — already at a record 11.7 percent — will remain high. If anything, the mistrust between Europe’s northern and southern countries is more intense than it was three years ago.
What follows are three plans that aren’t bound by the policy makers’ current orthodoxy. Right now, such ideas have little chance of being adopted by European leaders. But if the region doesn’t emerge from its slump, policy makers may need some bold solutions.
1. Tackling the Debt Problem
The first plan focuses on the crisis’s root cause, sovereign debt.
In the case of Greece, Europe’s leaders realized that the country’s debt could not be sustained. So Greek bonds have been written down and restructured.
European policy makers don’t want to do that for other countries, because it might prompt sell-offs in the region’s government bond markets and hurt the banks that hold sovereign debt.
As a result, potential candidates for a debt restructuring, like Portugal and Ireland, must try to bolster their economies while being weighed down with heavy debt burdens. The disadvantage of this approach is that private investors may simply stay away from these countries, weakening their economies indefinitely.
But one type of debt restructuring could be adapted to suit Europe’s situation. It is an approach championed by Lee C. Buchheit, a lawyer at Cleary Gottlieb Steen Hamilton, a New York law firm that has advised nations on debt restructurings. He acknowledges that big write-downs of sovereign debt could be too jarring and unpopular in Europe.
Instead, he says, a stressed country’s debt could be extended. For instance, under this plan, a 10-year government bond would not need to be paid back for, say, 30 years. And its interest rates could be substantially reduced, at the same time. Uruguay got this type of deal in 2003.
Stretching out the obligations would provide a long period in which troubled countries could right themselves, without the added stress of having to finance their debt. “Extending maturities long enough, at a sufficiently low coupon, is an alternative to inflicting a principal haircut on that debt stock.” Mr. Buchheit said.
Mr. Buchheit anticipates a potential hurdle to his plan. A large share of some countries’ debt is held by official lenders, like other governments. It is rare to amend the terms of official debt.
But Mr. Buchheit says there could be an advantage to applying the extension to official debt. It could increase the likelihood of private lenders returning to a country. “If the maturity date of all official sector debt was extended by 20 years, the market would know that it could lend for up to 19 years without fear of competing with official sector credits for payment,” Mr. Buchheit said.
If Europe got ambitious it could invite a wide range of countries to do debt extensions, including Italy, Belgium and Spain. The big economic obstacle is that the extended debt would initially have to be marked down, even if there were no actual haircuts to the debt’s principal.
This would hurt the holders of the government bonds and create financial instability. But that might soon be outweighed by the greater economic confidence created by the less oppressive debt load.
2. Printing Money
The second idea asserts that the European Central Bank should have more power to stimulate countries undergoing economic and financial stress.
In September, the region’s central bank did take a major step. The central bank’s president, Mario Draghi, said the bank would do “whatever it takes” to preserve the euro. To do that, it set up a new government bond-buying program, called outright monetary transactions. Just announcing the program helped drive up the prices of Italian and Spanish sovereign debt, making it easier for their governments to borrow,
But that effect may not last. Like other types of European aid, this program requires that the recipient nations agree to a strict set of conditions, which include economic and policies that are likely to create more austerity.
Such conditions present potential problems. They deter countries from taking the central bank’s support, which leaves a cloud of uncertainty hanging over their markets. And if a country’s government does agree to the conditions, the austerity can lead to more banking sector problems and even political instability.
Some analysts say the central bank should be unilaterally allowed to support unstressed countries without attaching strings to the program. “All the countries that might use this have already done austerity,” said Paul De Grauwe, a professor of European political economy at the London School of Economics.
Countries like Germany would object strongly to loosening the terms of any such program. But in reality such a step would merely make the central bank more like the Federal Reserve. For instance, the Fed hasn’t had to wait for Congress to pass certain bills before carrying out its own bond-buying programs.
3. Redrawing Boundaries
The third plan, from Hans-Olaf Henkel, a former German business leader, is the most radical in some ways. It would create two currency zones in Europe.
Northern countries like Germany and Holland would use one currency, while nations like Spain, Italy and France would belong to another. Once it traded, the southern euro would probably be worth less than the northern euro.
In such a situation, the southern countries would have undergone a currency devaluation. That could help correct some of the imbalances skewing Europe’s economy. Devaluations were the norm in the region before the euro, and often helped, says Mr. Henkel.
When a country’s currency falls in value, it increases the competitiveness of its economy. In particular, the country finds it easier to export. While the shot in the arm from a devaluation is temporary, it can create a useful window of time in which countries can institute necessary structural reforms.
Mr. Henkel says the plan could hold back the economies of northern euro countries, because their new currency would effectively be more expensive than the current euro. “It would hurt us,” he said. “But that would be our contribution to the competitiveness of the south.” The plan also envisions countries being able to move from one currency to the other.
Most European Union officials would vehemently oppose the two-currency approach. It would probably end their vision of a unified Europe.
But Mr. Henkel says Europe is already deeply divided. He said, “With this idea, we’d at least have a divide that is recognized.”
Article source: http://dealbook.nytimes.com/2012/12/11/3-unorthodox-ways-to-solve-europes-debt-crisis/?partner=rss&emc=rss
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