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Those chary of institutionalising financial integration without major political integration are right as well. A sound system must involve those with deep pockets who are on the hook for liabilities, either as borrowers or guarantors, having control over borrowing decisions. A system where I borrow and you repay is a prescription for unsustainable profligacy. This is why there is now so much discussion of eurobonds and Europe-wide deposit insurance being linked with much deeper political integration. But there are two problems that lie behind the soft references to greater integration. The first is the question of who really has control. If decisions are to be made on a genuinely euro area basis, it is far from clear, especially after the French election, that there is any kind of majority or even plurality support for responsible policies. If the idea is that the euro area’s future will be on the ECB model – a European façade behind which Teutonic policies are pursued – it is far from clear that this will or should be acceptable across the continent.
The second is the magnitude of the transfers that could be involved: A good guess would be that during the US savings and loan crisis the American southwest received a transfer equal to at least 20 pe rcent of its GDP from the rest of the country. Is there a real will to commit to potential transfers of this magnitude in Europe? Maybe all of this can be resolved, but it will surely not happen quickly.
Not all problems can be solved. It is not certain that the full repayment of all currently contracted sovereign debts, sustainable growth for all, and maintenance of all nations currently on the euro will prove feasible. The private sector, through its actions, is making clear that it recognises this painful reality. Official sector planning needs to recognise it as well. Outside of Europe, even as leaders hope for the best, they need to plan for the worst, ensuring adequate liquidity and demand in their economies even if the European situation deteriorates rapidly. The fortification of the IMF is a start in the right direction, but consideration needs to be given to national policies, to trade finance and to social safety nets as well.
Now is the time for radical reductions in the rates charged by official creditors to European sovereigns, for a willingness to subordinate official debts – not for the purpose of privileging private creditors but to offer a prospect for systemic preservation – and for expansionary monetary policies in Europe that prevent deflation and encourage the growth that can create jobs and reduce debt burdens. Only if the system is preserved can its future be debated.