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Politicians must face euro reform challenges

By Craig McGlashan
01 Apr 2014

The European Commission’s report on a eurozone debt redemption fund and eurobills throws up as many difficulties as it does potential benefits. But as politicians have relied on the inventiveness of the European Central Bank, rather than their own efforts, to calm the storm of the eurozone sovereign debt crisis, it is about time they took the steps needed to permanently cure the currency bloc’s ills.

While there were many advantages among the findings of EC-appointed experts into a shared eurozone debt redemption fund and eurobills released on Monday — including government debt market stabilisation, improved monetary policy transmission and a firm step towards full financial integration in the currency bloc — the findings also threw up a lot of challenges for policymakers.

Aside from the various complications involved at a technical level, the potential moral hazard involved with asking larger, less indebted countries to take on the risks of their perhaps more profligate neighbours raises all sorts of difficult questions. 

It was the assumption that the eurozone could not break up that helped some of those countries that later needed a bailout to borrow so much in the first place.

While the report outlines potential solutions to the moral hazard risk, it will be up to politicians to choose the workable options and apply them in reality.

That will not be easy, not least because the introduction of a debt redemption fund and eurobills would require a change to the EU treaty.

Anyone that remembers the difficulty of creating the Lisbon Treaty — rejected under the guise of a European constitution by French and Dutch voters in 2005 and by Irish voters in its first form in June 2008 — will know how difficult it could be to sell to voters.

With anti-EU parties gaining votes across the continent — including in the countries that rejected the EU constitution, France’s National Front and the Netherland’s Party of Freedom — such a change would require skillful political manoeuvring.

Sadly for euro-mantics, there has not been much to inspire confidence in European politicians’ ability to respond to events so far.

At the height of the eurozone debt crisis, as yields spiralled out of control and many thought Spain or even Italy could be forced to go cap in hand to the International Monetary Fund, politicians failed to address the eurozone’s birth defects.

Instead, the ECB president Mario Draghi had to act as paramedic to heal the markets with three words — “whatever it takes” — in July 2012 and the unveiling of the OMT shortly afterwards.

But the OMT can only ever be a short term solution. It is a nuclear option that no one wants to use, something that wields power only as a threat.

With peripheral eurozone sovereign spreads screaming in since Draghi’s intervention and floating around pre-crisis levels over recent months, politicians have been bought plenty of time. On a domestic level, those in the indebted nations have used it wisely to reform their economies and attempt to bring down deficits.

But politicians need to follow suit on the European stage. The choices may be difficult and the sell to electorates tough, but Draghi’s first-aid will not last forever. It’s time for Europe’s politicians to start the much-needed surgery to ensure the future of the eurozone.

By Craig McGlashan
01 Apr 2014