GiNN-BerlinKontor.—The Kiel Policy Brief 58 a of the Kiel Institute of World Economy comprises a set of short-term and long-term policy measures to overcome the crisis in the Euro area. “Neither the short-term nor the long-term measures are sufficient on their own. Instead, they need to be implemented in conjunction with one another.”
“The reason why the EURO zone crisis has dragged on for so long is that Europe’s leaders have focused too much on short-term measures to patch up the emergency of the moment, rather than formulating a comprehensive plan. Europe’s leaders have often not been honest with their electorates concerning what is necessary to put the euro zone on a sustainable path. Instead, they have frequently pretended that partial remedies are sufficient to deal with the problem. It is now high time to come clean by setting out the portfolio of policies that would be necessary to fix the euro zone’s fiscal, financial and growth problems.
Doing so will require reconciling the conflicting interests of the euro zone’s debtor and creditor countries. The debtor countries desperately need support to overcome their deep recessions and high national debt; and creditor countries need assurance that the euro zone will henceforth adopt sustainable institutions and policies to ensure that the euro zone never again falls into the current mess. In order for the euro zone crisis to be overcome, both needs must be met simultaneously. The Kiel Policy Package outlines a comprehensive plan that addresses this challenge.
The Kiel Policy Package rests on three pillars: fiscal policy, financial market reform and structural policy:
National fiscal policy: Each country of the euro zone must formulates its own national fiscal rule, specifying (1) its long-run target ratio of national debt to GDP, (2) its speed of convergence to this ratio, and (3) the countercyclicality of its fiscal policy. The Fiscal Compact that is currently under consideration in the euro zone does not give fiscal policy enough latitude to combat severe recessions and it does not aim for a constant ratio of national debt to GDP. In order to reduce the current budgetary distress of the debtor countries arising from the legacy of debt, and interest rate equalization fund should be established for a five-year, nonrenewable period.
EU financial market regulation: All countries of the EU must have a uniform system of financial sector regulation, supervision and resolution for both the banking in the shadow banking sectors. The system must apply uniform and transparent quality standards to collateral posted in refinancing transactions. To prevent bank insolvencies from destabilizing the economy, a European Bank Resolution Agency (EBRA) should be established to resolve insolvent banks and recapitalize illiquid ones. The remaining ESM funds should be restricted to this purpose. Furthermore, systemically relevant financial institutions should be required to pay the full cost of the risks that they generate, by issuing the adept in the form of contingent convertible bonds (Coco Bonds) that automatically converts debt into equity when the capital ratio falls beneath a trigger level.
National structural policies: The crisis countries should be given support by the EU to improve their long-term growth perspectives. This may be done through a combination of structural funds devoted to the accumulation of human and physical capital as well as policies to promote labor market flexibility, product market competition and privatization, as well as policies to reduce bureaucratic red tape and secure property rights.
All measures mentioned in the Kiel Policy Package would allow the ECB to return to its main objective, namely to ensure price stability in the euro area. It would also be a strong signal that monetizing government debt cannot be part of a long-term solution of the crisis.” (Source: ifw-kiel)