Economists Warn EU on 'Threshold of Catastrophe'

Der Spiegel, July 25, 2012

A panel of respected European economics experts are ringing the alarm bell this week over the euro crisis—direly calling on all European leaders to move swiftly to deploy the most powerful tools available to halt the currency’s downward spiral.

“We believe that as of July 2012, Europe is sleepwalking toward a disaster of incalculable proportions,” the New York-based Institute for New Economic Thinking (INET) stated in a report warning leaders they need to move faster and more decisively to save the common currency. Otherwise it could very well disintegrate.

The study’s publication on Tuesday couldn’t be any timelier, given the recent dramatic developments in the euro crisis. Greece’s recession is proving to be far worse than previously expected, it is getting tougher for Spain to raise money on the markets (on Tuesday, interest rates on 10-year Spanish bonds rose to an unsustainable 7.6 percent) and Germany’s top triple-A rating is also at risk.

In recent weeks, the situation in the more highly indebted euro-zone states has intensified dramatically, write the experts, who include Peter Bofinger and Lars Feld of Germany. As members of the Council of Economic Advisors, they are part of a respected panel that advises the German government on such issues. The study’s authors also include Beatrice Weder di Mauro, a former member of the panel who recently left to work for Switzerland’s UBS bank. The experts wrote that the crisis is the result of flawed design, construction and implementation of the finance and currency system. In order to rescue it, the economists are calling for a radical restructuring. “The sense of a never-ending crisis, with one domino falling after another, must be reversed,” they wrote.

Among other proposals, the economists are calling for:

•tighter integration of the financial system with a strong institution at the European Union or euro-zone level that would make stabilizing the banks a matter for all of Europe;

•the permanent euro rescue fund, the European Stability Mechanism, to be provided with a banking license as a lender in order to give it the “firepower” that it needs;

•the European Central Bank to better use all the tools at its disposal (both conventional and unconventional) in order to bolster the currency union.

But the report’s authors also stress that the structural reforms they recommend “would be sufficient to put the euro zone on a firm footing” only if they are accompanied by the reduction of national deficits and if countries also restore their competitiveness.