Can the euro survive Merkel, Sarkozy and Barroso? - by Guy Verhofstadt

"Desperate diseases call for desperate remedies,’ as the proverb proclaims. And the failure to administer them is precisely the explanation for the plight of the euro. The euro crisis simply will not go away. The euro itself is reacting like a yoyo, rising and falling, its value fluctuating unpredictably. Meanwhile, the tensions in the euro area are assuming unprecedented proportions. The disparities between Germany and most of the Southern European member states (Greece, Italy, Portugal, Spain) are becoming an increasingly yawning gulf. This is despite the more than €400 billion that the member states, the European Central Bank (ECB) and the International Monetary Fund (IMF) have injected into the countries and banks at risk in the form of loans, buying-up programs and all manner of guarantees.

It is not difficult to identify the reason for this instability. From the inception of the Greek crisis, the response of most European leaders was one of vacillation. Rather than adopting a series of Draconian measures to deal with Greece from the outset, in conjunction with an unshakable determination to come to the country’s assistance and not allow it to go bankrupt, they blew hot and cold. Doubts were even openly expressed as to whether there was still any point in keeping Greece on board. Ultimately it took a full six months before work began on a first instrument, the European Financial Stability Facility (EFSF), to provide practical assistance to those countries in the euro area which were at risk.

The European Central Bank has now ceased to help euro countries which are struggling. In the absence of effective and well-considered action by the member states, the ECB has been compelled to buy massive quantities of government bonds from the countries most at risk. The ECB’s portfolio now includes more than €76 billion in the form of mostly Greek, Irish and Portuguese government bonds, which are worth a little less each day due to the falling ratings. The ECB is rightly no longer willing to be lumbered with the role of compensating for the lack of action by our dithering European political leaders.

The establishment of a liquid European bond market, which would attract savings from inside and outside Europe, is the keystone of the overall strategy which is needed to overcome the euro crisis. Essentially, the 'eurobond market’ would be a forum for the trading of two kinds of bonds. ‘ Project bonds’ would be issued specifically to finance long-term investment in, for example, road infrastructure, energy networks, the internet and research projects.

‘Eurobonds’ meanwhile are bonds designed to bring about a general restoration of the European economy. Thanks to the European Union’s general AAA rating and thanks to greater liquidity, the interest which would have to be paid on the bonds would be less than on the bonds of any European country. Part of the revenue would serve to put the banks on a sounder footing, more precisely to fund the necessary recapitalizations. On the other hand, eurobonds should be used to tackle the debt problem. Part of the debt of the member states can be covered by issuing eurobonds. Those who perform well and reduce their debt can take full advantage of the lower interest rate on eurobonds. Those who do not, and who retain persistently high debt burdens, would not be allowed to participate in the eurobond system to the same extent. In that way, eurobonds would become an instrument to compel countries to display greater discipline and implement more reforms without endangering the stability of the euro area itself.

In the past year and a half, the European Union has displayed many doubts, much disunity and sometimes not much solidarity or responsibility. As a result, the very existence of the euro is at stake. It is therefore high time for us to abandon half-hearted solutions."

Note EU-Digest: Guy Verhofstadt is one of the few European political leaders who has the vision of a Europe which can be a  world political and economic power in its own right, instead of a decaying continent populated by short sighted populist and  nationalistic politicians and  a poverty stricken population.

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