Red Lines

In the question of how to handle the eurozone crisis, the sole contribution offered by numerous experts is to condemn virtually all of the solutions currently being floated. No alternative solutions are suggested, apart from reiteration of the need for programmes of fiscal consolidation and adjustment in the embattled countries at Europe's periphery. Such fiscal measures are of course essential – this is beyond doubt. But if the markets remain unconvinced by such efforts, what then?

In any event, the lament that a great mistake was made when Greece was admitted into the currency union is hardly helpful. Incidentally, it would be interesting to confront those who advocated Greece's accession to the euro with their statements at the time: "As the cradle of democracy, Greece cannot be excluded", or "Greece's economic weight is rather insignificant for the eurozone". To be sure, Greece's membership in the currency union was politically desired, but economically highly problematic, as was rightly pointed out by various economic policy institutions. Be that as it may, such arguments do not help in the current search for a way out of the crisis. Indeed, the current treaty framework does not provide for a Greek exit, and to neglect this fact would be to invite accusations of contempt for the rule of law. A voluntary exit, should the Greeks entertain the idea, carries the danger of a break-up of the currency union, due to domino effects. Those nostalgic for the German Mark might welcome this prospect, although recent experience in Switzerland should give pause for thought as to what happens when a country's currency comes under massive revaluation pressure.

The various proposals that won't solve the euro crisis have already been discussed at great length. Several options are off the table, and for good reason, including the unlimited purchase of sovereign bonds by the European Central Bank, banking licences for the EFSF rescue fund, dedicated loans by national central banks to the IMF, or eurobonds. Instead of such measures, goal-oriented programmes of fiscal consolidation and reform are needed, and for good reason.

The hope that such efforts will be enough to calm the markets might not be unrealistic. But if this hope does prove unfounded, what then? Political imponderables such as the election of new governments or referendums may unleash considerable turbulence in already jittery financial markets, in spite of economically credible adjustment programmes. And what then?

With its recently proposed ‘European Redemption Pact’, the German Council of Economic Experts has suggested a model that could help to establish a sustainable and functional currency union – i.e. the avowed goal of the resolutions passed by heads of state and government on December 9, 2011 – irrespective of some unsolved questions of detail.

Under the European Redemption Pact member countries would be able to gradually transfer their sovereign debt in excess of 60 per cent of GDP into a joint fund for which all member states would be liable. This debt pool would be automatically phased out over time due to a strict repayment schedule. Repayment would be assured through the introduction of a ‘brake’ on the creation of new debt as well as a national tax expressly for debt reduction in each member state; furthermore, participants would have to pledge the currency and gold reserves of their central banks against their debt servicing obligations. These conditions, gradual debt repayment, and a ‘roll-in’ phase make the European Redemption Pact a solution that is markedly different from eurobonds.

The European Redemption Pact is anything but a problem-free and easy road out of the crisis. Yet has anyone offered another viable alternative, beyond drawing red lines and encouraging us to be hopeful?