European Leaders to Present Plan to Quell the Crisis Quickly
The head of the European Central Bank and other euro zone leaders worked on Saturday on a grand vision for the euro zone meant to reassure investors and allies that flaws in the currency union will be addressed quickly.
The plan will include measures to prevent bank runs and reduce what has become a vicious cycle of government debt problems turning into banking crises, as has happened in the past two years. In addition, the plan will push for countries to remove the regulations and layers of bureaucracy that inhibit competition, keep young people out of the work force or make it difficult to start a new business.
The goal would be to make the euro zone less vulnerable to crises and better able to grow its way out of the current debt crisis. But it is unclear whether yet more pledges to reform will calm financial markets.
Mario Draghi, the president of the central bank and one of the authors of the plan, said Friday that it would be unveiled within days, ahead of a meeting of European leaders at the end of June.
Under the plan, euro zone leaders will seek to establish the central bank as supreme bank regulator with broad powers, in place of the relatively toothless European Banking Authority.
Countries would also create a deposit insurance program to augment national programs. The goal would be to reassure ordinary depositors and prevent bank runs, an imminent danger in Spain as well as Greece. But any sharing of financial burdens almost automatically encounters opposition in Germany. For example, Mr. Draghi has not advocated pooling euro zone debt into common bonds, an alternative that Germany rejects, at least for the near term.
Mr. Draghi is unlikely to soften the central bank's insistence that euro zone countries continue to pursue budgetary austerity even as their economies sputter. But the plan may call for governments to go about belt-tightening differently. Instead of slashing transportation projects or other infrastructure, for example, leaders would be pressed to cut operating expenditures.
Central banks and investors have been bracing for the markets' reaction Monday following national elections in Greece on Sunday, which could determine whether the country is capable of remaining part of the euro.
On Saturday Benoît Cœuré, a member of the European Central Bank's executive board, underlined Mr. Draghi's comments, saying that Europe needs unified banking regulation to replace the hodgepodge of national regulators and deposit insurance programs that now exist. A so-called banking union would help break "the adverse feedback loop between banks and sovereigns, in which doubts about the solvency of the sovereigns feed doubts about the solvency of the banks, and vice versa," Mr. Cœuré told bankers in southern France.
The euro zone has no shortage of plans, pacts and treaties intended to end years of sluggish growth and impose discipline on its 17 members. The challenge for Mr. Draghi and the plan's authors — Herman Van Rompuy, president of the European Council; José Manuel Barroso, president of the European Commission; and Jean-Claude Juncker, head of the euro group of euro zone ministers — will be to package their plan in a way that makes investors believe that something will finally get done.
"There is a long-standing agenda on growth," Mr. Draghi told a gathering of economists on Friday in Frankfurt. "It is time to implement it."
The most difficult task for Mr. Draghi and the other leaders may be to establish a binding timetable, to ensure that political leaders do not drag their feet. The leaders are "only capable of acting at gunpoint" — when markets force them to, Willem H. Buiter, chief economist at Citigroup, said at the same gathering.
Over the past year, authorities in Brussels have steadily accumulated an array of new powers, but that has not yet been enough to reassure investors that the euro zone can survive the crisis.
For now, the most important new tool is a half-dozen rules known as the Six-Pack, which took effect in December. In coming months, the European Commission will be able to impose fines on euro zone countries of up to 0.2 percent of their gross domestic products if they flout rules on public debts and deficits.
In March, European Union members agreed to a fiscal compact, championed by Germany, requiring countries to introduce balanced budget rules. Britain and the Czech Republic did not sign the agreement.
The European Union also is seeking agreement on rules that would require member states to present public finance plans in greater detail, and sooner than is now the case, to the commission.
Over the years, countries have repeatedly pledged to clear the rules that hinder competition and led to chronically anemic growth. If the euro zone grew faster, tax receipts would rise and the debts of countries like Spain or Italy would seem less daunting.
But most countries have been deeply reluctant to tamper with regulations that protect established businesses from competition or workers from dismissal. In practice, the rules make companies reluctant to hire new people and have contributed to astronomical youth unemployment.
Any grand plan must ultimately win approval from euro area citizens, perhaps via referendum.