Economic Thinkers Try to Solve the Euro Puzzle
Most people have heard of the Marshall Plan. Some might even know what Brady bonds are. But they have not yet heard of the Brunnermeier plan. Or Bishop bonds. Or the Gros accord.
That is because they do not exist yet — except as dreamy proposals by economic thinkers to fix the European debt crisis.
While dealing with Europe’s financial difficulties has been a grim slog for the Continent’s austerity-weary citizens and its frustrated policy makers, it is the opportunity of a lifetime for ambitious idea merchants looking for fame.
If any of them can come up with a plan that is adopted by Europe, they will have secured a coveted place in history — like George C. Marshall, the secretary of state who fashioned the plan to help rebuild Europe after World War II, and Nicholas F. Brady, the Treasury secretary whose introduction of a class of investor-friendly bonds helped end the Latin American financial debacle in the early 1990s.
Three in particular who are respected in top policy circles and have access to the right people are Markus K. Brunnermeier, Graham Bishop and Daniel Gros.
Each is proposing a grand plan to save the euro zone from financial ruin — and to do it in a way that may break through the political impasse that has made a solution so elusive. None of them, or anyone else, are assured of success, given the depth of Europe’s problems and the difficulty of reaching consensus among the 17 European Union countries using the euro .
The rival approaches vary. But all are meant essentially to help the two big euro zone countries on the financial precipice — Spain and Italy — find buyers for their debt at a reasonable enough cost that their governments can afford to recharge their economies over the long run. Success would mean developing a solution that persuades cash-rich Germany that it will not be on the hook if these countries run out of money.
Armed with PowerPoint presentations and not a little guile, they have been promoting their competing ideas in meetings in Brussels, the center of the European Union; Frankfurt, home of the European Central Bank; and, in particular, Berlin, where the approval of German government officials is essential to the adoption of any plan.
“There is no shortage of ideas to solve the crisis, but there is a shortage of actionable plans,” said Mr. Brunnermeier, a finance professor from Germany at Princeton who represents Euro-nomics, a recently formed group of nine euro zone economists focused on the European crisis.
As he has shopped his plan, which calls for a type of Europe-backed bond that would not place an onerous claim on German coffers, Mr. Brunnermeier has traveled a similar circuit as the other two who are promoting their own euro restoration blueprints: Mr. Gros, the head of an influential Brussels research group, and Mr. Bishop, a British specialist on European Union financial and regulatory matters.
The odds remain long that any of these proposals will be adopted in full. History-shifting ideas tend to come from within government — as was the case of the Marshall Plan or the Brady bonds — not outside it.
But arriving at a plan that satisfies the euro-using countries, and Germany in particular, has stumped government officials. Thus the opening for the well-connected policy entrepreneur.
And there is little time to lose given the fund-raising needs of Europe’s weaker nations.
According to a report by Bridgewater, a large United States hedge fund, Spain and Italy must issue 300 billion euros, or $368.5 billion, worth of bonds this year and 1.6 trillion euros, or nearly $2 trillion, by 2015. Cash-depleted banks in those countries are now following the lead of foreign investors by reducing their bond purchases, causing Spain’s and Italy’s borrowing costs to climb to dangerously high levels in recent weeks.
Mr. Brunnermeier and Mr. Bishop are pushing variants of a common euro bond that would represent a pooling of some of Europe’s national debts.
Mr. Gros supports turning the Continent’s new rescue fund, the European Stability Mechanism, into a licensed bank and using it to buy distressed Spanish and Italian bonds. He first floated the idea in a 2011 paper written with Thomas Mayer, Deutsche Bank’s chief economist at the time. And it is now under scrutiny in European power corridors.
"In A Crisis, What Matters Is Liquidity"
“In a crisis, what matters is liquidity,” Mr. Gros said during an interview.
Last week, when Ewald Nowotny, an Austrian member of the governing council of the European Central Bank, was quoted as saying there were arguments in favor of such a plan, European bond markets rallied on the news.
The European Central Bank’s governing council will meet Thursday, and the financial world will be awaiting word of how the central bank’s president, Mario Draghi, intends to keep his recent pledge to “do whatever it takes” to protect the euro currency union.
Mr. Gros, who is German but went to college in Italy and earned a doctorate in economics from the University of Chicago, is now director of the Center for European Policy Studies. He argues that the euro zone’s current rescue programs are too small to cast fear into the hearts of speculators who are helping to drive up borrowing costs for the bloc’s weakest members.
Why not, he proposes, use the European Stability Mechanism’s 500 billion euro cash cushion as leverage, to borrow up to five times as much from the European Central Bank? The money could then be used to buy distressed Italian and Spanish bonds in the open market.
That, he says, would be easier and quicker than lending directly to those countries as part of a bailout. “You buy a Spanish bond at 75 cents to the dollar and you automatically reduce the country’s debt,” he said.
Mr. Gros has been pitching his proposal largely to German Finance Ministry officials in Berlin, without whose support the central bank would be unlikely to adopt such a plan. While he will not reveal the details of his interactions with the Finance Ministry, he points out that the government has not yet said no.
At more or less the same time, Mr. Brunnermeier has been making his own case in the same German circles.
At the root of his Euro-nomic group’s proposal is the need in Europe for a safe financial asset that would stem the chaos of investors fleeing risky Spanish and Italian bonds and buying German securities.
Mr. Brunnermeier and his colleagues argue that a new European debt agency should be formed that, over time, would buy up to 5.5 trillion euros worth of euro zone governments’ debt directly from governments and on the secondary market.
The debt agency would issue two types of euro bonds to finance these purchases. One would supposedly be extra-safe, backed by the full credit of the euro zone. The other would be riskier, and investors would know going in that they would take a loss if a country like Spain or Italy defaulted.
Mr. Brunnermeier has nicknamed his low-risk bond the Esbie, for European safe bond. Crucially, he points out, the Esbie is different from the original euro bond proposal that Germany rejected because each country would still be responsible for making good on its own debts. The richer ones would not be fully liable for backing the bonds if the weaker countries got into trouble, as would have been the case under earlier euro bond proposals.
The Esbie has the whiff of a pipe dream. The supposed safety of a common European bond without a 100 percent German guarantee may be difficult to sell to investors under current market conditions. But Mr. Brunnermeier says that his peers in Germany are intrigued.
“I think this has a good chance of working,” said Mr. Brunnermeier, who has traveled to Frankfurt and Berlin frequently over the last months to press his case. “This is the least costly option.”
Less ambitious, although based on a similar principle of not holding Germany liable for all debts, is Mr. Bishop’s plan.
Mr. Bishop, a former investment banker and adviser to the European Commission, represents the European League for Economic Cooperation, a group of entrepreneurs who support closer integration in Europe.
He has been pushing the idea of a euro zone fund of about 2.5 trillion euros that would issue a series of short-term debt securities to match the borrowing needs of all euro zone countries.
The member nations’ guarantees would follow the model of Europe’s current bailout vehicle, the European Financial Stability Facility , with Germany backing just 28 percent of the fund and thus not being obliged to pump in more money if a Spain or an Italy defaulted on its debts.
Some experts wonder whether these proposals, in their potentially daunting complexity, miss a larger point: that the euro zone sovereign debt crisis will not be resolved until Germany and other rich northern countries agree to accept the losses in the south through debt write-downs, whether by Greece, Ireland, Spain or Italy.
“These proposals just move the losses and risks around,” said Adam Lerrick, a sovereign debt specialist and visiting scholar at the American Enterprise Institute. “There are real economic problems in Europe. Financial engineering can conceal them from taxpayers but it cannot make them disappear.”
But Mr. Bishop, who spends much of his time in Brussels, has already presented the plan to Herman Van Rompuy, president of the European Union’s administrative body, the European Council. He noted that Mr. Van Rompuy alluded to the proposal when he and other leaders laid out their vision in late June for the euro zone’s future.
And lest there be any doubt that the three thinkers sense a competition among their proposals, Mr. Bishop makes it clear. “It’s the front-runner,” he said of his group’s action plan. “And it also represents an integral step toward coordinating mutual policies in Europe.”