The 5 possible parts of a “master plan” to save the euro
By Brad Plumer,
Sorry, optimists. Europe is still in crisis — even after the $125 billion bailout of Spain’s banks over the weekend. So when the European Union holds its next summit on June 28 and 29, they’re going to have to thrash out a more lasting solution.
Is the “master plan” in here?
1) A banking union: One of the euro zone’s most urgent crises is the slow-motion bank run occurring across Europe. If you have euros stashed in a Spanish or Greek bank, your deposits are technically insured by the Spanish or Greek governments. But what if those governments themselves run out of money? Or what if those countries decide to leave the euro? Suddenly, your deposits won’t be quite worth as much. So, quite reasonably, depositors in those countries are yanking their euros out of these banks and sending them to safe havens like Germany. And that’s making financial institutions in Greece and Spain even more rickety, which is hurting economic growth and deepening the crisis.
One way to stop the bank run and re-instill confidence in the banking system is to loan the banks more money. That’s what Spain recently announced it would do, borrowing money from the rest of Europe to inject into the banks. But, remember, people are worried about Spain itself running out of money. So this move hasn’t quelled the panic.
An alternative would be a European-wide “banking union.” This would entail some sort of pan-European deposit insurance, so that if a bank in Spain or Italy goes bust, all of Europe would help bail out the depositors. This would have to be combined with some sort of broader bank supervision as well as a way to restructure or close failing banks. The system would resemble the federal deposit insurance that the United States has — if a bank in Texas goes bust, the federal government guarantees (through the FDIC) that ordinary people gets their money back. That’s why bank runs in the United States are rare.
The catch? For one, taxpayers in other euro zone countries would be responsible for how a bank in, say, Italy behaves. There’s the risk of subsidizing irresponsible lending. Second, any system for Europe to bail out banks directly — rather than funneling the money through, say, the Spanish government — could require E.U. treaty changes that could take months or years to ratify. Not ideal for stopping an immediate crisis.
2) Eurobonds: There’s a second crisis plaguing the euro zone. Right now, lenders and investors are nervous that a bunch of individual countries on the euro — from Spain to Portugal to Greece — might not repay their debts. So the cost of borrowing money for those countries has been spiking at various points. (Spain and Italy are the latest casualties.) That, in turn, makes those nations’ debt crises even worse, which raises the risk of a horrible death spiral, and so on.
The logic behind eurobonds is that, rather than individual countries trying to borrow money on their own, the entire continent would borrow money together, as a unit. Spain and Greece would, in effect, pay the same interest rates on their debts as France and Germany do. Since the euro zone as a whole is large and rich, that would calm the panic over individual countries. And troubled nations would get a bailout. If Portugal only had to pay the average interest rate of euro members, its annual debt payments would fall by €15 billion, or 9 percent of its GDP.
Not surprisingly, German politicians aren’t tickled by this idea — Germany would have to pay much more to borrow money under this arrangement. So one recent compromise proposal, according to Der Spiegel, is to split country borrowing into two parts. Individual nations would still be on the hook for debt that they’ve already racked up. But new debt could be financed by joint eurobonds. It remains to be seen whether this would be big enough to help troubled periphery countries.
3) More stimulus: If euro zone countries could only grow at a faster pace, their large debt burdens would be less of a concern. But how do you get Europe’s countries to grow faster? One proposal now in the works is for various euro zone countries to chip in about $12.47 billion to the European Investment Bank, which will fund infrastructure projects around the continent.
The upside here is that most E.U. governments are on board with this idea. The downside is that this is a tiny stimulus. Remember, economic growth in many euro zone countries is still being weighed down by austerity measures — tax hikes and spending cuts. Analysts at ING recently estimated that core countries (like Germany and France) would need to provide stimulus worth about 1 percent of their GDP to boost growth in places like Italy and Spain by 1 to 2 percentage points. Or the European Central Bank could provide some more inflation and monetary stimulus to boost growth. But these latter, more drastic proposals have all been deemed “politically unrealistic.”
4) But also… more oversight: You’ll notice that most of the ideas above are basically schemes of transferring money from taxpayers in “core countries” like Germany, France, Netherlands, and Finland to troubled countries like Spain, Greece, and Portugal. Yet German politicians aren’t just going to hand this cash out freely. They want new conditions that would restrain other European countries from taking on new debt and getting into this crisis again. One possibility that’s been floated: All countries would have to receive explicit permission before borrowing more than 3 percent of GDP.
5) Preparing for Greek turmoil: There’s also another important task at hand. Remember, before the summit, on June 17, Greek voters will go to the polls and elect a new government. The big question is whether this new government will repudiate an earlier agreement that gave Greece billions of dollars in aid in exchange for new spending cuts.
If Greece does repudiate the agreement, there’s a possibility that the country would be forced to leave the euro. According to Reuters, euro zone officials are quietly discussing how to prepare for this scenario. That would include everything from limiting the size of ATM withdrawals to tightening up the borders and constraining the flow of capital — all in order to prevent further bank runs and alleviate fears that Spain or Italy might leave next (those countries are big enough that their exit would be really unwieldy).
So that, in a nutshell, is what a master plan might look like. Here’s how Der Spiegel sums it up: “Germany would have to take on additional risks within the euro zone. In return, southern Europeans would have to grant Brussels control over their national budgets — according to German principles.” Now who wants to bet on the odds of this happening?