The current bailout of Europe has failed and is not likely to bring about the euro zone out of the crisis. It is therefore inevitable that it will be replaced by another economic concept.
The current rescue package consists of a banking Rekapitalisierungspaket, the euro rescue of the EFSF and ESM, a fiscal pact and an extremely generous monetary policy. Each of these four elements has serious weaknesses.
This requires the Rekapitalisierungspaket that banks increase their capital ratio to nine per cent - giving them an incentive to shrink their balance sheets and thus to award fewer loans and sell the bonds of highly indebted countries. Both are in a crisis is not really helpful.
The support capacity of the EFSF and ESM is not enough to secure greater crisis countries such as Spain and Italy. Due to the insufficient creditworthiness of some countries, the capacity can not currently be extended.
Thus, the proposed fiscal pact will be the Euro countries agree to limit their deficits to a maximum of 0.1 percent of gross domestic product. Only in severe recessions is a deficit ratio of more than three per cent be allowed. Short in combating the recession is hindered, the long-term pact leads to falling public debt ratio, which state investment in education and infrastructure - inhibit - and thus the long-term growth.
Also, the current ECB monetary policy is not sustainable. Because of low interest rates and the almost unlimited liquidity can lead to neglect of risk costs and hence to financial bubbles.
None of the four pillars of the current rescue package can solve the euro crisis sustainably. Therefore, the current system will be replaced sooner or later by a new economic policy construct. Here is not a new solution proposal, seriously, there are only two likely alternatives - and both were primarily from the German perspective is anything but desirable.Euro Bonds have long term serious Fiolgen
One possibility would be the much discussed Euro Bonds. Although in the short term would probably interest the average in the euro area falling overall because the Chinese central bank expected to increasingly buy euro bonds and U.S. government bonds would sell it to diversify their portfolio. These interest rates would, however, obscure the long-term consequences of such a measure, which sooner or later will inevitably come to light.
For the long-term consequences of euro bonds would be serious. The German interest rates would rise significantly and the Greek fall because everyone would pay the average interest rates. In the short term, it would not be noticeable to the German voters likely that changes in interest behind this relationship a gigantic North-South transfers within the euro zone hides - long would this insight does not stop and would bring great tensions within the euro zone with it.
Euro bonds would also generate large misallocations within the euro area, because the interest of a country would be out of proportion to the risk of default. That would weaken the incentive for highly indebted countries to operate finally a responsible fiscal policy, clearly. This highly-indebted countries would continue into debt even higher, which would grow the imbalances between creditor and debtor countries continue -. Until the next, even bigger crisisInflation would be a black future
The second alternative is inflation. The more, the euro area has relied on the European Central Bank (ECB) to stabilize its financial markets, the less the ECB is able to devote themselves to the fight against inflation. Sooner or later, the point will come when the ECB is caught in a conflict and either raise interest rates in order to combat an inflation flare up, or keep interest rates low in order to keep the European financial markets stable. When the financial markets recognize this conflict, it is the ECB have hard to get inflation expectations under control. You could then become a self-fulfilling prophecy.
Both scenarios would mean for Europe, a black future. To avoid these alternatives, Europe must rethink and say goodbye to conventional approaches. A simple four-point plan could make an important contribution to securing the future of Europe.
First Europe needs a "breathing fiscal rule". After a particularly serious problem in the current Fiscal Pact, is that it requires indebted countries to launch massive austerity programs. The countries are already in an economic depression - as currently Greece, Portugal, Italy and Spain. And the austerity programs exacerbate the crisis and thus lead to the opposite of what they really want to achieve: as a result of the economic downturn, falling tax revenues - and transfers rise. This in turn increases the national debt, which creates new demands for austerity measures that exacerbate the economic crisis again. This creates a vicious circle. Therefore, it is necessary to allow recession-affected countries, to stimulate the economy through government spending and tax cuts.
A breathing fiscal rule would allow exactly that: Every country in the euro zone should include a fiscal rule in its constitution, which provides for long-term debt ratio of more than 60 percent of gross domestic product and about how quickly this will be achieved. At the same time must be defined as strongly anti-cyclical fiscal policy should be. This would ensure that an expansionary fiscal policy during recessions also attracts a restrictive fiscal policy in boom times by himself.
Second It must solvency criteria for EU countries are defined. For this, the ECB establish transparent, accountable and publicly communicated criteria. In the event of insolvency of the affected country would go through an orderly bankruptcy and should get in this time, no money by the ECB. Financial contagion would be banned, as other euro countries under its fiscal rules could meet the solvency criteria.
Third The European Commission should use its funds in order to support growth through targeted investments in countries with current account deficits. This could also be used by the European Investment Bank. With such a growth pact, the EU Commission could ensure greater competitiveness in weaker euro-member countries.
4th It must be ensured that large financial institutions whose failure would create macroeconomic problems and mean as a threat to state solvency would not be able to fail. Under the current system, these institutions can be sure to keep their profits in good times to be able to, while large losses are absorbed by the government in bad times. This leads to excessive risk-generated - finally have these financial institutions do not carry their own risk costs.
To solve this problem, new incentives. One possibility would be to require such institutions to include their debt in the form of convertible bonds. Once minimum capital requirements are no longer met, the bonds would automatically be converted into shares - balance sheet considered, so debt would be transformed into equity.
This simple measure would have important implications might not excessive debt because the bonds convert into shares if the capital ratio falls too much. Thus, the capital requirements would have been met. The cost of debt and the associated risks would be borne by the shareholders and no longer have to be borne by taxpayers. Thus the institutions would avoid even a strong incentive to excessive debt - because the shareholders would put pressure on the management to avoid excessive debt, because the conversion of bonds into shares would result in a dilution of the value of existing shares by itself.
Such a four-point plan had the potential to solve the euro crisis and the euro area to sustainably breathe new growth. You just have to want it. All that is necessary for the implementation of this plan is a portion of political will - and above all courage to say goodbye to conventional ways of thinking. This is not the moment yet.
The current rescue package consists of a banking Rekapitalisierungspaket, the euro rescue of the EFSF and ESM, a fiscal pact and an extremely generous monetary policy. Each of these four elements has serious weaknesses.
This requires the Rekapitalisierungspaket that banks increase their capital ratio to nine per cent - giving them an incentive to shrink their balance sheets and thus to award fewer loans and sell the bonds of highly indebted countries. Both are in a crisis is not really helpful.
The support capacity of the EFSF and ESM is not enough to secure greater crisis countries such as Spain and Italy. Due to the insufficient creditworthiness of some countries, the capacity can not currently be extended.
Thus, the proposed fiscal pact will be the Euro countries agree to limit their deficits to a maximum of 0.1 percent of gross domestic product. Only in severe recessions is a deficit ratio of more than three per cent be allowed. Short in combating the recession is hindered, the long-term pact leads to falling public debt ratio, which state investment in education and infrastructure - inhibit - and thus the long-term growth.
Also, the current ECB monetary policy is not sustainable. Because of low interest rates and the almost unlimited liquidity can lead to neglect of risk costs and hence to financial bubbles.
None of the four pillars of the current rescue package can solve the euro crisis sustainably. Therefore, the current system will be replaced sooner or later by a new economic policy construct. Here is not a new solution proposal, seriously, there are only two likely alternatives - and both were primarily from the German perspective is anything but desirable.Euro Bonds have long term serious Fiolgen
One possibility would be the much discussed Euro Bonds. Although in the short term would probably interest the average in the euro area falling overall because the Chinese central bank expected to increasingly buy euro bonds and U.S. government bonds would sell it to diversify their portfolio. These interest rates would, however, obscure the long-term consequences of such a measure, which sooner or later will inevitably come to light.
For the long-term consequences of euro bonds would be serious. The German interest rates would rise significantly and the Greek fall because everyone would pay the average interest rates. In the short term, it would not be noticeable to the German voters likely that changes in interest behind this relationship a gigantic North-South transfers within the euro zone hides - long would this insight does not stop and would bring great tensions within the euro zone with it.
Euro bonds would also generate large misallocations within the euro area, because the interest of a country would be out of proportion to the risk of default. That would weaken the incentive for highly indebted countries to operate finally a responsible fiscal policy, clearly. This highly-indebted countries would continue into debt even higher, which would grow the imbalances between creditor and debtor countries continue -. Until the next, even bigger crisisInflation would be a black future
The second alternative is inflation. The more, the euro area has relied on the European Central Bank (ECB) to stabilize its financial markets, the less the ECB is able to devote themselves to the fight against inflation. Sooner or later, the point will come when the ECB is caught in a conflict and either raise interest rates in order to combat an inflation flare up, or keep interest rates low in order to keep the European financial markets stable. When the financial markets recognize this conflict, it is the ECB have hard to get inflation expectations under control. You could then become a self-fulfilling prophecy.
Both scenarios would mean for Europe, a black future. To avoid these alternatives, Europe must rethink and say goodbye to conventional approaches. A simple four-point plan could make an important contribution to securing the future of Europe.
First Europe needs a "breathing fiscal rule". After a particularly serious problem in the current Fiscal Pact, is that it requires indebted countries to launch massive austerity programs. The countries are already in an economic depression - as currently Greece, Portugal, Italy and Spain. And the austerity programs exacerbate the crisis and thus lead to the opposite of what they really want to achieve: as a result of the economic downturn, falling tax revenues - and transfers rise. This in turn increases the national debt, which creates new demands for austerity measures that exacerbate the economic crisis again. This creates a vicious circle. Therefore, it is necessary to allow recession-affected countries, to stimulate the economy through government spending and tax cuts.
A breathing fiscal rule would allow exactly that: Every country in the euro zone should include a fiscal rule in its constitution, which provides for long-term debt ratio of more than 60 percent of gross domestic product and about how quickly this will be achieved. At the same time must be defined as strongly anti-cyclical fiscal policy should be. This would ensure that an expansionary fiscal policy during recessions also attracts a restrictive fiscal policy in boom times by himself.
Second It must solvency criteria for EU countries are defined. For this, the ECB establish transparent, accountable and publicly communicated criteria. In the event of insolvency of the affected country would go through an orderly bankruptcy and should get in this time, no money by the ECB. Financial contagion would be banned, as other euro countries under its fiscal rules could meet the solvency criteria.
Third The European Commission should use its funds in order to support growth through targeted investments in countries with current account deficits. This could also be used by the European Investment Bank. With such a growth pact, the EU Commission could ensure greater competitiveness in weaker euro-member countries.
4th It must be ensured that large financial institutions whose failure would create macroeconomic problems and mean as a threat to state solvency would not be able to fail. Under the current system, these institutions can be sure to keep their profits in good times to be able to, while large losses are absorbed by the government in bad times. This leads to excessive risk-generated - finally have these financial institutions do not carry their own risk costs.
To solve this problem, new incentives. One possibility would be to require such institutions to include their debt in the form of convertible bonds. Once minimum capital requirements are no longer met, the bonds would automatically be converted into shares - balance sheet considered, so debt would be transformed into equity.
This simple measure would have important implications might not excessive debt because the bonds convert into shares if the capital ratio falls too much. Thus, the capital requirements would have been met. The cost of debt and the associated risks would be borne by the shareholders and no longer have to be borne by taxpayers. Thus the institutions would avoid even a strong incentive to excessive debt - because the shareholders would put pressure on the management to avoid excessive debt, because the conversion of bonds into shares would result in a dilution of the value of existing shares by itself.
Such a four-point plan had the potential to solve the euro crisis and the euro area to sustainably breathe new growth. You just have to want it. All that is necessary for the implementation of this plan is a portion of political will - and above all courage to say goodbye to conventional ways of thinking. This is not the moment yet.
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