The present crisis of the euro zone is a direct consequence of a half-hearted, half-considered, half-explained, and therefore half-finished integration process.
Based on the European principle of decision making by the smallest common denominator, the European Union (EU) has always been determined to create incomplete, suboptimal, and often diluted solutions, which had to be re-addressed in later crises.
Today political economy is back with a vengeance.
“We all know what we need to do, what we don’t know is how to get re-elected if we do what we need to do,” is attributed to a reputable European leader. This is the core dilemma of the last three years. It is fine: Elected political leaders have to seek renewed democratic support within their constituencies.
To find a politically workable, economically sustainable solution, four basic questions need to be raised, considered and answered by the national communities of the EU:
Is there any country that does not have its fair share of guilt in the problems of the euro, or who has not benefited from its imperfect existence before the crisis?
No, it is clear, that both core and peripheral EU countries had a decisive role in the incomplete design and subsequent dilution of the Maastricht criteria. And the gains of a weaker euro and the single market are obvious for the export driven German economy as well as the undeservedly fast improvement in living standards in the south.
Is it fair to expect from the citizens of Germany and other core EU countries to sign an open check (again) for the citizens of the periphery?
There is a strange reversal of the Lineker-principle: The EU is a football pitch where 27 countries play and always the Germans pick up the bill.
Only a solution that clearly ring-fences the cost of the past, and excludes the repetition of such mistakes in the future, can be even considered. No single free rider country should be able to hold the others to ransom anymore. But the relevant portion of the cost of previous mistakes have to be born by everyone.
Is it fair to expect the citizens of Greece to go into a long tunnel without the slightest hope that there is an opening on the other end?
It is obvious by now that Greece cannot repay its current level of debt, even if all the current respectable efforts are maintained for decades. Without hope the process will end in social-economic and political chaos. But it is clearly inevitable, that even if Greece could substantially reduce its debt burden, a long–term, painful effort will be needed to restore growth and to return to financial markets.
Would anybody be better off, if the euro ceased to exist and member states returned to their own currencies?
Clearly not. The dissolution of the euro zone would cause immediate recession and economic chaos in Europe (and to a large extent elsewhere) with unforeseeable social and political, but well calculable economic consequences, and would probably lead to the end of the current form of European integration. This in turn would accelerate the decline of the European continent and make the process irreversible. However, as originally envisaged, a corrected, strong and sustainable euro could give a significant medium-term boost to those efforts trying to save as much as possible of the welfare state-model and to revive the continent’s global economic and political strength in a 21st century multipolar world.
By answering these obvious questions, we define the political narrative through which the increasingly euro-skeptic electorate should be addressed by their respective leaders, and the political framework within which economic proposals have a chance to survive the existing political resistance.
Based on these criteria, one politically feasible set of solutions is the following:
First, there is an immediate need to reduce contagion risks and restore overall credibility towards financial markets. Therefore the European banking system need to be recapitalized based on appropriate (politically non-biased) stress tests. A prudent solution for that is the transformation of EFSF/ESM into a European Monetary Fund, which is able to buy participations in systematically important financial institutions, which can leverage itself (via ECB or markets) and which, similar to the International Monetary Fund , has relatively strong independence from short-term political influence (and so it has credibility).
Second, guarantees against profligacy need to be established in the governance of the euro zone. Therefore, the already approved new economic governance toolkit (the six pack, euro plus pact) should be linked with a pre-agreed orderly, quick, and almost automatic exclusion mechanism from the euro zone as an ultimate sanction of notorious non-delivery by any country. This, combined with constitutional fiscal rules, independent monitoring, and stronger and permanent coordination of fiscal and competitiveness policies, should be the ultimate guarantee, that no one member state is allowed to put the others at risk. Medium-term recovery plans for countries at risk of contagion should be linked to this new regime to improve credibility.
Third, a socially and economically manageable perspective has to be offered to Greece, in exchange for continuous painful efforts by the Greek society and the political elite in the future. Greek sovereign debt should be restructured within the euro zone to reduce it to approximately half of the current level (to less than 80 percent of gross domestic product). This should be achieved through a partial, significant haircut to private investors, as well as a conditional cancellation of a portion of public debt. The conditions of public debt cancellation have to be strictly linked to the milestones and key steps of a 10-year realistic fiscal consolidation, and competitiveness enhancing program with the ultimate aim for Greece to return to proper debt service, sustainable growth, and market financing. The key targets of this program should be accepted by a supermajority of the Parliament of Greece.
In case of a breach of the key conditions later, Greece should be excluded from the euro zone based on the above mechanism and the conditionally cancelled (suspended) part of the public debt should also be reactivated.
The acceptance of such solutions in core European countries will require political courage from leaders of otherwise competing political parties in the center, often reaching through usual lines of fire. But even the most euro-skeptic voters of today will not be thankful when they experience the consequences of a possible euro zone collapse.
Even if Europe finds the right road forward, it will be a painful travel for a couple of years. And the ultimate responsibility of political leaders is to make the sacrifice worthwhile.
Gordon Bajnai is the Former Prime Minister of Hungary’s crisis management government (2009/10) and a Visiting Professor at Columbia University, SIPA and has joined the Johns Hopkins University Paul H. Nitze School of Advanced International Studies (SAIS) as a distinguished fellow.