In Defense of Europe’s Grand Bargain
The current European economic crisis is principally fiscal in nature. During the weekend of May 8–9, 2010, European leaders crafted a very important and constructive political “grand bargain” between EU member states and the European Central Bank (ECB) with far reaching, positive implications for the credibility of the European Union’s fiscal policy framework and the long-term sustainability of European government finances. There is no chance that the eurozone will break up as a result of the current economic crisis, or in the long term, from the effects of the grand bargain. Leaving the euro will come at catastrophic cost to any nation that tries to do so out of economic weakness. If Greece is ultimately forced to default on its debts, it is certain the Greek government would want to do it within the eurozone. As such, a Greek default poses no risk to the composition of the eurozone, which considering that a German departure is equally unlikely, is a secure monetary union.
Kirkegaard suggests a set of required next steps for Europe: (1) European governments must immediately begin to address the lingering uncertainties surrounding the capital adequacy of the eurozone banking system; (2) it is crucial that eurozone governments, particularly among the Southern members, deliver expeditiously on the austerity and not least structural reform commitments recently made; and (3) the eurozone should consider introducing a potential “carrot” for members that successfully manage to put their government finances on a sustainable path. This carrot could come in the form of a future common “Maastricht bond,” similar to the often suggested “eurobond,” but open only to eurozone member s that actually adhere to the Maastricht Treaty debt stock criteria of a maximum level of government debt of 60 percent over an entire business cycle. A successfully launched pan-European Maastricht bond, backed by the credibility of years of painfully endured austerity measures across a sufficient number of participating member states, could achieve a scale and market depth not far off today’s US treasury market. A Maastricht bond could consequently pose the first serious threat to an increasingly fragile US treasury market as the “global safe haven” asset.