How Europe Can Rescue Europe

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At their meeting in Romelast Thursday, the leaders of the eurozone’s four largest economies agreed onsteps towards a banking union and a modest stimulus package to complement theEuropean Union’s new “fiscal compact.” Thosesteps are not enough.

German Chancellor Angela Merkel resisted all proposals to provide reliefto Spain and Italyfrom the excessive risk premiums that bothcountries are now confronting. As a result,the EU’s upcoming summit could turn into a fiasco, which may well prove lethal, because itwould leave the rest of the eurozone without a strong enough financial firewallto protect it from the possibility of a Greek exit.

Even if a fatal calamity can be avoided, the division between creditor anddebtor countries will be reinforced, and the “periphery” countries will have nochance to regain competitiveness, because the playing field is tilted against them. This may serve Germany’s narrow self-interest, but it willcreate a very different Europe from the opensociety that fired people’s imagination and propelled European integration for decades. Itwill make Germanythe center of an empire and permanently subordinatethe “periphery.” That is not what Merkel or the overwhelming majority ofGermans stand for.

Merkel argues that it is against the rules to use the European CentralBank to solve eurozone countries’ fiscal problems – and she is right. ECBPresident Mario Draghi has said much the same. Indeed, the upcoming summit ismissing an important agenda item: a European FiscalAuthority (EFA) that, in partnership with the ECB, could do what the ECBcannot do on its own.

In particular, the EFA could establish a Debt Reduction Fund – a modifiedform of the European Debt Redemption Pact thatwas proposed by Merkel’s Council of Economic Advisers and endorsed by Germany’sSocial Democrats and Greens. In exchange for specified structural reforms in Italy and Spain, the Fund would acquire andhold a significant portion of their outstandingstock of debt. It would finance the purchases by issuing European Treasurybills – joint and several obligations of the member countries – and pass on thebenefit of cheap financing to the countries concerned.

The Treasury bills would be assigned a zero-risk rating by the authoritiesand treated as the highest-quality collateral for repooperations at the ECB. The banking system has an urgent need for risk-freeliquid assets. Banks are currently holding more than

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关键词：Europe Rescue euro scue ESC resisted banking package provide towards

steps towards a banking union and a modest stimuluspackage to complement the European Union’s new “fiscalcompact.”  are not enough.
Merkel argues that it is against the rules to use theEuropean Central Bank to solve eurozone countries’ fiscal problems – and she isright. the upcoming summit is missing an important agenda item: a European Fiscal Authority (EFA) that, inpartnership with the ECB, could do what the ECB cannot do on its own.
In particular, the EFA could establish a DebtReduction Fund – a modified form of the EuropeanDebt Redemption Pact that was proposed by Merkel’s Council of EconomicAdvisers,In exchange for specified structural reforms in Italyand Spain,the Fund would acquire and hold a significant portion of their outstanding stock of debt. It would finance thepurchases by issuing European Treasury bills – joint and several obligations ofthe member countries – and pass on the benefit of cheap financing to thecountries concerned.

The Treasury bills would be assigned a zero-risk rating by the authoritiesand treated as the highest-quality collateral for repooperations at the ECB. The banking system has an urgent need for risk-freeliquid assets. Banks are currently holding more than