Five ways to start the euro res­cue op­er­a­tion

It's crazy. It might be the case that the euro isn't worth sav­ing. This col­umn has cer­tainly ar­gued that it has turned into a bank­ruptcy ma­chine.

The Pak Banker - - Editorial - Matthew Lynn

An­other sum­mit, an­other messy com­pro­mise. With the euro fac­ing re­newed cri­sis, and with Por­tu­gal, Spain, Bel­gium and Italy all un­der the same kind of pres­sure that forced Greece and Ire­land into a bailout, the stage was surely set for a clear and de­ci­sive de­fense of the sin­gle cur­rency. And what did the Euro­pean Union's lead­ers come up with af­ter high-level talks in Brus­sels? A two-line treaty amend­ment.

It's crazy. It might be the case that the euro isn't worth sav­ing. This col­umn has cer­tainly ar­gued that it has turned into a bank­ruptcy ma­chine. It would be bet­ter for the pe­riph­eral na­tions to get out now --and bet­ter in the medi­umterm for the EU as well.

But given that no one is con­tem­plat­ing that yet, it would surely make sense to come up with a cred­i­ble plan for sal­vaging the euro. Boost­ing pub­lic spend­ing in Ger­many, dou­bling the size of the emer­gency fund and cre­at­ing clear eco­nomic rules for the euro area would be among the best places to start.

"Our de­ter­mi­na­tion is clear," said the EU Pres­i­dent Her­man Van Rom­puy in a state­ment at the close of the Brus­sels meet­ing. "The heads of state and govern­ment of the euro zone stand ready to do what­ever is re­quired to en­sure the sta­bil­ity of the euro zone as a whole."

Tough words. The trou­ble is, words aren't enough. When it came to ac­tion, this had all the force of a pea-shooter when a cruise mis­sile is needed. All the EU ac­tu­ally man­aged to come up with was a mi­nor treaty amend­ment to cre­ate a per­ma­nent debtcri­sis mech­a­nism in 2013. It amounted to less than 50 words. It was a fee­ble and timid re­sponse.

If you want to get real about do­ing what­ever is re­quired to save the euro, there are five steps that could be taken now to shore up con­fi­dence in the cur­rency:

--One, boost pub­lic spend­ing in Ger­many and run big­ger bud­get deficits. The pe­riph­eral coun­tries need to ex­port more. They can only do that if some­one else im­ports more. Sure, not all the ex­tra spend­ing in Ger­many will go to­ward Greek or Ir­ish ex­ports. It will buy a lot of Korean TVs, just like ev­ery­one else is. And, sure, the Ger­mans hate to run bud­get deficits. Bal­anc­ing the books is part of the na­tional ethos. But ei­ther you want to save this thing or you don't. Get­ting the Ger­mans to spend more has to be part of the res­cue pack­age.

--Two, dou­ble the size of the 750 bil­lion euro ($980 bil­lion) bailout emer­gency fund. There's enough in the kitty to bail out Ire­land and Por­tu­gal. But proba- bly not Spain, and cer­tainly not Italy. The thing is this: The EU is en­gaged in a bat­tle with the mar­kets over the fu­ture of the euro. If there isn't much ammo in the locker, the traders will be tempted to keep ham­mer­ing away. So get more ammo. The mar­kets will keep pick­ing fights un­til you make it clear they can't win.

--Three, cre­ate Eu­robonds. Only by pool­ing the debts of the pe­riph­eral and core na­tions into sin­gle euro-area bonds can enough money be raised on rea­son­able terms to sal­vage the sin­gle cur­rency. Of course the Ger­mans and the French don't want to end up pay­ing the bills for other coun­tries. Vot­ers don't want to see their taxes sent abroad ei­ther. But get real. Ger­many and France are on the hook for Greek, Ir­ish and Span­ish debts any­way. They may as well raise money to­gether. It will be cheaper --and more hon­est as well.

--Four, re­write the treaties so that euro-area gov­ern­ments cede ul­ti­mate con­trol over bud­get and tax poli­cies to Brus­sels. True, ev­ery­one will com­plain about an un­ac­cept­able sac­ri­fice of inde- pen­dence. But how much eco­nomic sovereignty do Greece and Ire­land have left any­way? Just about none. The EU, the Euro­pean Cen­tral Bank and the In­ter­na­tional Mon­e­tary Fund are pay­ing the bills and call­ing the shots al­ready. All the pe­riph­eral coun­tries are go­ing to have to give up most of their au­ton­omy to stay in the euro, so it might as well hap­pen sooner rather than later. If that means ne­go­ti­at­ing a new treaty, so be it.

--Five, pre­pare for aus­ter­ity. Ac­cord­ing to cal­cu­la­tions by the London-based Cen­tre for Eco­nom­ics and Busi­ness Re­search, Greece, Ire­land, Spain, Por­tu­gal and Italy will need to cut govern­ment spend­ing by 10 per­cent, and con­sumer spend­ing by 15 per­cent, to stay within the euro. That is slightly more than the 14 per­cent drop in con­sump­tion the Bri­tish en­dured dur­ing World War II. It is go­ing to in­volve mas­sive sac­ri­fices, so it would be bet­ter to lay out now what kind of pain is in­volved. Peo­ple will be an­gry, but they will be a lot an­grier if you don't level with them.

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