31 July 2012

NYT: Three answers to the euro puzzle

Three experts who are not part of the eurozone's policy-making machinery, but are respected in top policy circles, have been promoting competing plans for solving Europe's debt debacle. Can Markus K Brunnermeier, Graham Bishop or Daniel Gros come up with a plan that is adopted by Europe?

The rival approaches vary. But all are meant essentially to help the two big eurozone countries on the financial precipice — Spain and Italy — find buyers for their debt at a reasonable enough cost that their governments can afford to recharge their economies over the long run. Success would mean developing a solution that persuades cash-rich Germany that it will not be on the hook if these countries run out of money.

Mr Brunnermeier and Mr Bishop are pushing variants of a common eurobond that would represent a pooling of some of Europe’s national debts.

Mr Gros [from the Centre for European Policy Studies] supports turning the Continent’s new rescue fund, the European Stability Mechanism, into a licensed bank and using it to buy distressed Spanish and Italian bonds. He argues that the eurozone’s current rescue programmes are too small to cast fear into the hearts of speculators who are helping to drive up borrowing costs for the bloc’s weakest members. Why not, he proposes, use the European Stability Mechanism’s €500 billion cash cushion as leverage, to borrow up to five times as much from the European Central Bank? The money could then be used to buy distressed Italian and Spanish bonds in the open market. That, he says, would be easier and quicker than lending directly to those countries as part of a bailout. “You buy a Spanish bond at 75 cents to the dollar and you automatically reduce the country’s debt”, he said.

Mr Brunnermeier is a finance professor from Germany at Princeton who represents Euro-nomics, a recently formed group of nine eurozone economists focused on the European crisis. At the root of his Euro-nomic group’s proposal is the need in Europe for a safe financial asset that would stem the chaos of investors fleeing risky Spanish and Italian bonds and buying German securities. Mr Brunnermeier and his colleagues argue that a new European debt agency should be formed that, over time, would buy up to €5.5 trillion worth of eurozone governments’ debt directly from governments and on the secondary market. The debt agency would issue two types of eurobonds to finance these purchases. One would supposedly be extra-safe, backed by the full credit of the eurozone. The other would be riskier, and investors would know going in that they would take a loss if a country like Spain or Italy defaulted.

Mr Brunnermeier has nicknamed his low-risk bond the Esbie, for European safe bond. Crucially, he points out, the Esbie is different from the original eurobond proposal that Germany rejected because each country would still be responsible for making good on its own debts. The richer ones would not be fully liable for backing the bonds if the weaker countries got into trouble, as would have been the case under earlier eurobond proposals.

Less ambitious, although based on a similar principle of not holding Germany liable for all debts, is Mr Bishop’s plan. Mr Bishop, a former investment banker and adviser to the European Commission, represents the European League for Economic Cooperation, a group of entrepreneurs who support closer integration in Europe. He has been pushing the idea of a eurozone fund of about €2.5 trillion that would issue a series of short-term debt securities to match the borrowing needs of all eurozone countries. The member nations’ guarantees would follow the model of Europe’s current bailout vehicle, the European Financial Stability Facility, with Germany backing just 28 per cent of the fund and thus not being obliged to pump in more money if a Spain or an Italy defaulted on its debts.

Mr Bishop, who spends much of his time in Brussels, has already presented the plan [Bishop Bills] to Herman Van Rompuy, president of the European Union’s administrative body, the European Council. He noted that Mr Van Rompuy alluded to the proposal when he and other leaders laid out their vision in late June for the eurozone’s future.

And lest there be any doubt that the three thinkers sense a competition among their proposals, Mr Bishop makes it clear. “It’s the front-runner”, he said of his group’s action plan. “And it also represents an integral step towards coordinating mutual policies in Europe.”

Full article

© New York Times