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In Order to Survive Euro Zone Starts Busy Structural Reforms

Following Greece, Ireland, respectively, after the outbreak of the crisis, financial plague spread to Portugal, Spain and even Italy, the euro has plunged into serious crisis. There are three possible prospects: First, the "muddle through" (to continue the current "credit plus prayer"); the second is "disintegrated" (debt restructuring into a disordered state, some vulnerable members quit Monetary Union); the third is "to strengthen integration "(indicates that some form of financial Union).

Under false pretenses - a member of the difficulties in financing, with fiscal adjustment and structural reforms and other conditions, hopes they are just working hard rather than insolvency - just an unstable non-equilibrium state. Really, if the reform and other policies can not strengthen the integration, and quickly return to the edge of the country's economic growth in the euro zone the momentum that this non-equilibrium state will disintegrate into disorder.

Cause of the crisis is excessive debt and excessive private sector leverage, with the crisis and the recession weakened financial position, with the loss of most private plans to get out through the financial system was assessed to the whole society, the private debt crisis into a public debt and public deficit crisis. Still later, a number of government by hit (Greece and Ireland) lost the ability to market financing from the International Monetary Fund (IMF) and the European Union to relief.

However, if the European governments generally fall into insolvency situation, there are those who will help government agencies to get out over it? So, now perfunctory way will soon hit a wall, to the time you need another set of programs to save the euro zone was.

Institutional reforms have taken the first step, in the form of official resources to build a large pond, the equivalent of a quasi-fiscal union. Sufficient resources available to help the official Greece, Ireland and Portugal turnaround, but can not prevent market problems in Spain and other members of the short-term euro zone government bonds and financial liabilities, the expected self-fulfilling runs.

So even if these countries implement the necessary fiscal and structural reforms, still need more official resources. Nervous investors not wanting to become a run on the last one, if the lack of official resources, it is possible disorderly scramble for way out of the situation.

In view of the Financial not completely unified, there is no alternative to the euro area bonds and other forms of official resources to increase by a large-scale expansion of the European Financial Stability Fund (European Financial Stability Facility) or by the European Central Bank holdings of long-term debt, increasing liquidity to operate, etc. achieved. Means that the quasi-fiscal union, the euro zone economy may eventually have the core of systematic help rescue the edge of economy, only the edge of transferring part of the official national fiscal sovereignty - and long-term commitment to strict fiscal discipline - to overcome Germany and other core the country's current political resistance.

However, even if not enough to expand the pool of official resources to resolve Greece, Ireland and Portugal and Spain, existing or potential insolvency problem. Hence the need for the second round of policy and institutional reform, to "kill" banks and other financial institutions, creditors, those uneasy - they must accept the reality of loss (ie, "flesh"). This is to prevent more private debt is shifted into the government's balance sheet, resulting in new financial shocks. If this process need to create a new cross-border mechanism to liquidate insolvent banks in Europe, it was quickly established without further ado.

Similarly, the super-government institutions should not continue to help those insolvent, not just cash flow problems of the government. Therefore, the orderly settlement mechanism in the bank, the European government bonds should be issued as soon as possible an orderly restructuring plan. Chancellor Angela Merkel as Germany's did, until 2013, only to implement the reorganization, will destroy the confidence of the market, because bond holders then have to cut a larger piece of "meat."

Therefore, it should be through the exchange offer in 2011 ordered the implementation of market-oriented restructuring. If done early enough, can limit the exchange offer for the loss of private creditors. Through the provision of delayed maturity and lower interest rates than the current market rate of the new bonds, the nominal value of existing bonds can be avoided by the official count. Waiting will only lead to disorderly debt restructuring operations and the heavy loss of private creditors.

Finally, Europe needs a range of policies to restore the edge of the country euro-zone export competitiveness and economic growth, GDP in these countries are either still in shrink (Greece, Spain and Ireland), or weak growth (Italy and Portugal). No growth would be difficult to stabilize the public and private debt and the GDP share of the deficit - the primary indicators of financial stability. In addition, no growth, tighten their belts protests aroused by the pain will eventually collapse of the financial weight and structural reforms.

Unfortunately, the financial weight and structural reforms have raised the effects of recession and deflation - at least in the short term is so, so the need for other policies to revive growth. European Central Bank should greatly ease monetary policy to promote the wave of growth, to prepare for the start of reform. In addition, the German national fiscal consolidation should be postponed, it should maintain the number of years of tax cuts to promote the national economic growth and trade support through the growth of the periphery.

The next few months, we will be able to see, whether policy makers in Europe to reach a compromise and rigorously enforce the reform, to combat the crisis, to save the euro zone. Either towards closer European integration (which is a stable equilibrium state), or have to face the danger of disintegration.
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Article Added on Monday, April 23, 2012
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