The eurozone must use all available methods to implement New Deal-style programs before it's too late.
Angela Merkel has recently sought support for measures to penalize EU member states with debt in excess of 60% of GDP -- the nominal limit of the Stability and Growth Pact, or SGP. Meanwhile, Germany has introduced a balanced budget provision into its constitution. This is not unrelated to the word for debt in German, Schuld, which also means guilt and leads to Nietzsche's claim that creditors seek to punish debtors for it.
Yet what is needed in Europe now is also German: a Gestalt shift to recognize that while EU member states are deep in debt from salvaging banks and hedge funds, the European Union itself has next to none. It had none at all until May this year, when the European Central Bank began to buy up tranches of some member states' national debt. But this is both costly and ineffective. Spreads on Greek bonds have risen to 10%, which is unsustainable. A serial default of several eurozone member states is possible.
A simpler and costless solution would be to cut the Gordian Knot on national debt by transferring a share of it to the European Central Bank. If this were up to 60% of GDP, as allowed by the SGP, it would reduce the default risk for the most exposed member states, lower their debt servicing costs, and signal to financial markets that European governments have a proactive response to the current crisis, rather than being passive victims of unelected credit rating agencies. A 'tranche transfer' would not be a debt write-off. The member states whose bonds are transferred to the ECB would be responsible for paying the interest on them, but at much lower rates.
Yet debt stabilization alone is not the answer to Europe's current crisis. EU governments are aiming to cut both debt and fiscal deficits on a scale that threatens beggar-my-neighbor deflation, denies their 2008 commitment to a European Economic Recovery Plan, and risks a double dip recession and a massive crisis of confidence both in the markets and in governments.
The eurozone needs to learn from Roosevelt's New Deal, whose success gave Truman the confidence to fund the Marshall Aid, from which Germany herself was a beneficiary. The key was borrowing to invest through US Treasury bonds. These do not count toward the debt of US states such as California or Delaware, nor need European bonds count toward the debt of EU member states.
Many economists have claimed that Europe cannot save itself until it has the fiscal federalism to transfer resources from stronger to weaker member states. Germany is strongly opposed to this. Yet Europe neither needs such fiscal federalism, nor the 'economic government' called for by Nicholas Sarkozy, to finance a New Deal-style recovery program. The institutions and powers are already in place.
The European Investment Bank -- already twice the size of the World Bank -- issues bonds that are its liability, not that of member states, which is why national governments need not count funding from it on their national debt. Since 1997, the EIB has been given a joint cohesion and convergence remit by the European Council to invest in health, education, urban regeneration, green technology and support for small and medium firms. Since then it has quadrupled its annual lending to €80 billion, or two thirds of the 'own resources' of the European Commission, and could quadruple this again by 2020. This would be equivalent in funding terms to postwar Marshall Aid.
The EIB only co-finances investments. But this could be matched by net issues of EU bonds or euro bonds by the ECB, which would attract surpluses from the central banks and sovereign wealth funds of emerging economies and stabilize the eurozone. When Jacques Delors proposed such bonds in 1993, both Germany and France were opposed. Now only Germany is opposed.
Nor does this depend on the ECB in place of governments. The Lisbon Treaty confirms that the ECB's primary objective shall be to maintain price stability. But also that "without prejudice to that objective, it shall support the general economic policies of the Union in order to contribute to the achievement of the latter's objectives." This mirrors the constitution of the Bundesbank, which obliges it "to support the general economic policies of the government." The European Council is also empowered by the Treaty to define "general economic policies," and the European Economic Recovery Plan is already one of them. With the EU heading for a double dip recession, there is no risk to price stability.
This calls for a German Gestalt shift both on debt stabilization and on issuing EU bonds. Or, if Germany will not shift, their introduction -- like the euro itself -- by some rather than all member states both to safeguard the eurozone and to make a reality of a European recovery program.
Stuart Holland is a visiting professor Faculty of Economics University of Coimbra and former adviser to Jacques Delors.
Cross-posted from New Deal 2.0.
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