[Viewepoint] Riding to the rescue of the euro

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[Viewepoint] Riding to the rescue of the euro

Another summit, another messy compromise. With the euro facing renewed crisis, and with Portugal, Spain, Belgium and Italy all under the same kind of pressure that forced Greece and Ireland into a bailout, the stage was surely set for a clear and decisive defense of the single currency.

And what did the European Union’s leaders come up with after high-level talks in Brussels? A two-line treaty amendment.

It’s crazy. It might be the case that the euro isn’t worth saving. This column has certainly argued that it has turned into a bankruptcy machine. It would be better for the peripheral nations to get out now - and better in the medium-term for the EU as well.

But given that no one is contemplating that yet, it would surely make sense to come up with a credible plan for salvaging the euro. Boosting public spending in Germany, doubling the size of the emergency fund and creating clear economic rules for the euro area would be among the best places to start. “Our determination is clear,” said EU President Herman Van Rompuy in a statement at the close of the Brussels meeting. “The heads of state and government of the euro zone stand ready to do whatever is required to ensure the stability of the euro zone as a whole.”

Tough words. The trouble is, words aren’t enough. When it came to action, this had all the force of a pea-shooter when a cruise missile is needed. All the EU actually managed to come up with was a minor treaty amendment to create a permanent debt-crisis mechanism in 2013. It amounted to less than 50 words. It was a feeble and timid response.

If you want to get real about doing whatever is required to save the euro, there are five steps that could be taken now to shore up confidence in the currency:

One, boost public spending in Germany and run bigger budget deficits. The peripheral countries need to export more. They can only do that if someone else imports more. Sure, not all the extra spending in Germany will go toward Greek or Irish exports. It will buy a lot of Korean TVs, just like everyone else is. And, sure, the Germans hate to run budget deficits. Balancing the books is part of the national ethos. But either you want to save this thing or you don’t. Getting the Germans to spend more has to be part of the rescue package.

Two, double the size of the 750 billion euro ($980 billion) bailout emergency fund. There’s enough in the kitty to bail out Ireland and Portugal. But probably not Spain, and certainly not Italy. The thing is this: The EU is engaged in a battle with the markets over the future of the euro. If there isn’t much ammo in the locker, the traders will be tempted to keep hammering away. So get more ammo. The markets will keep picking fights until you make it clear they can’t win.

Three, create Eurobonds. Only by pooling the debts of the peripheral and core nations into single euro-area bonds can enough money be raised on reasonable terms to salvage the single currency. Of course the Germans and the French don’t want to end up paying the bills for other countries. Voters don’t want to see their taxes sent abroad either. But get real. Germany and France are on the hook for Greek, Irish and Spanish debts anyway. They may as well raise money together. It will be cheaper - and more honest as well.

Four, rewrite the treaties so that euro-area governments cede ultimate control over budget and tax policies to Brussels. True, everyone will complain about an unacceptable sacrifice of independence. But how much economic sovereignty do Greece and Ireland have left anyway? Just about none. The EU, the European Central Bank and the International Monetary Fund are paying the bills and calling the shots already. All the peripheral countries are going to have to give up most of their autonomy to stay in the euro, so it might as well happen sooner rather than later. If that means negotiating a new treaty, so be it.

Five, prepare for austerity. According to calculations by the London-based Center for Economics and Business Research, Greece, Ireland, Spain, Portugal and Italy will need to cut government spending by 10 percent, and consumer spending by 15 percent, to stay within the euro. That is slightly more than the 14 percent drop in consumption the British endured during World War II.

It is going to involve massive sacrifices, so it would be better to lay out now what kind of pain is involved. People will be angry, but they will be a lot angrier if you don’t level with them.

Of course, when you lay out starkly the things that need to be done to rescue the euro it becomes clear that it is hardly worth it. Few people in Europe are likely to sign up to that package of measures.

But it is far better to be honest about the scale of the task ahead than to stumble from one half-hearted summit to the next.

*The writer is a Bloomberg News columnist.

By Matthew Lynn
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