By Maximilian Clarke
A holistic approach to solving the interconnected crises threatening the survival of Europe’s single currency must be undertaken by member states in order to prevent catastrophic failure, a professor warns.
By examining the nature of the eurozone crisis, Loughborough University Professor and Vice Chairman of the Banking Stakeholder Group at the European Banking Authority, David Llewellyn, has identified the three main challenges facing the bloc and formed his own 10-point plan that Europe’s leaders must adopt in order to prevent collapse.
Without swift action, notes Llewellyn, the continent’s economies- including those not under the single currency area including the UK, would be thrown back into recession.
Llewellyn identifies the challenges as:
− That Greece cannot service its own debt and its new austerity measures virtually guarantee it will need to default or fundamentally re-structure its debt.
− Many European Banks are not sufficiently capitalised to cope should various sovereign debts default. With an estimated shortfall of around €250 billion, only a bank re-capitalisation programme could enable a concerted, holistic strategy to deal with the various dimensions of the crisis.
− Fundamental fault-lines in the Euro and monetary union project and the membership structure of the Euro-zone mean that, as a transnational monetary union without an effective crisis mechanism in place, bailing out other member states will eventually be resisted by tax-payers in donor countries. Yet greater fiscal union is resisted by some richer countries fearful of subsidising weaker countries (as evidenced by Germany), and by weaker countries fearful of electoral unpopularity.
In order to address the pressing and interconnected challenges, the following must be implemented:
1. An early, internationally coordinated and realistic re-capitalisation of banks.
2. Public sector injections of capital in banks in some cases but with clear conditions attached.
3. Realistic sovereign debt re-scheduling and re-structuring where necessary.
4. A substantial increase in rescue funds (perhaps to around €2 trillion from the current level of €440 billion).
5. Bailout conditions must avoid the austerity trap. They should be robust but realistic.
6. Bailout conditions need a medium-term strategy, combining short term support with an adjustable pace of repayments over the long term depending on economic conditions.
7. Address the fiscal elements of the Euro’s fault-lines either through fiscal union, or credible, monitored and sanctioned tighter fiscal governance.
8. Separate support arrangements for solvent but illiquid countries to avoid them expecting the same treatment as insolvent countries.
9. Develop effective cross-border bank Resolution arrangements to avoid bank failures having systematic and tax-payer costs.
10. Define a realistic role for the European Central Bank.
Join us on