A new start for the Eurozone: dealing with debt

The recent, still timid progress in the Eurozone towards recovery and institutional consolidation is tainted by concerns over the possible return of financial instability and/or a long period in which growth remains anaemic. Although a recovery seems finally to be on the way, it is quite weak and there is little room for complacency if one looks at unemployment rates. The Eurozone architecture is unfinished business in many respects. This report focuses on three issues because they are important and they can be addressed without a fully-fledged fiscal federation or changes to the Treaty. The components of our proposal are: 1. A one-time debt stock operation to rapidly reduce sovereign debt, particularly in the highly indebted peripheral countries. We offer a menu of options, one of which is a debt buyback through the commitment of future revenues, which could include seigniorage, VAT or a wealth (transfer) tax. This does not involve any redistribution across members of the currency union, but it would not be sufficient to eliminate the overhang. Therefore, we discuss a number of other choices, including a European solidarity tax with some limited redistribution across countries and 'debt-equity' exchange with GDP-indexed bonds. 2. A strengthened sovereign lending framework for the ESM, which both creates strong market-based incentives to avoid excessive debt levels in the future and makes future debt restructuring – should it become necessary – less painful than is currently the case. 3. A set of regulatory changes that discourage and limit the exposure of banks to sovereign debt, particularly that of their own sovereign. This should be complemented by the creation of a European synthetic bond that does not require mutualisation, but would constitute a safe asset and could facilitate unconventional monetary policies by the ECB. Certainly, our goal is ambitious: we propose to kill the three birds of enforcing long-run fiscal discipline, dealing with the legacy debt overhang and breaking the sovereign bank loop with one stone. This would require a concerted effort and significant investment of political capital, which may only become available if the fragility of the present situation becomes apparent. However, the solutions to these three problems are strongly complementary and would generate


Publication infos:
London, Centre for Economic Policy Research, 2015
Publication year:
2015
Number of pages:
80 p. : ill.
Collection:
Monitoring the Eurozone ; 1
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 Record created 2018-11-09, last modified 2019-07-30

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