Euro Crisis, Causes and Solutions

Tom McDonnell: Despite the developments at last week's EU summit we remain a long, long way from a successful resolution of the Euro crisis. My own thoughts on what should be done are in this TASC discussion paper.

I welcome any comments or feedback.

One more roll of the dice

Tom McDonnell: There seems to be a growing consensus (finally) that only the ECB has the capacity to end the immediate crisis in the Euro zone. The French are now pushing ECB intervention as indeed are the Spanish, Italian and Belgians. Our leaders will get maybe one more roll of the dice to save the Euro. Unfortunately the Merkel doctrine of "no lender of last resort", "no fiscal transfers", and no "countercyclical fiscal mechanism" may yet prevent a happy ending to this story. No number of agreed Treaty changes about interference in national budgets and imposing discipline is going to change that fact.

To prevent meltdown of the currency some form of Treaty change is required to alter the mandate of the ECB. Treaty change to make the ECB a lender of last resort and the introduction of Eurobonds should be expedited. If tighter fiscal oversight is the price then it is worth paying.

Treaty proposals and changes seem inevitable and in that context it is the responsibility of the Irish Government to fully engage with this process to ensure that the proposed new rules and decision making architecture are fit for purpose and consistent with long-term recovery. There is a danger that the events of the last eighteen months have permanently changed the decision making process in Europe in a way that excludes small countries. This is a disturbing development that needs to be reversed.

Lender of Last Resort

Tom McDonnell: Bernard Delbecque proposes using the EFSF as a lender of last resort here. The ECB is the other plausible candidate. The lack of a lender of last resort for the Euro zone has been one of the most significant design flaws in the make-up of monetary union and has contributed greatly to the explosion in bond spreads in the last two years.

Guaranteed Lender of Last Resort

Tom McDonnell: The often useful VOXEU resource has produced a number of constructive pieces on the debt crisis in the last week or so.

Paul DeGrauwe does a good job of describing the inherent fragility of the Eurozone as currently designed. His main proposal is the establishment of a guaranteed lender of last resort for government bonds. The ECB being the natural candidate to take on this role.

Charles Wyplosz argues there are really just two possibilities to solve the crisis. The first possibility, echoing DeGrauwe, is to make the ECB perform the function of a guaranteed lender of last resort. In this scenario the ECB would simply guarantee the rollover of maturing sovereign debt at face value. The second possibility is to pursue one of the many variations of the Eurobond option that currently has Merkel and the Bundesbank wailing against the dying of the light. Audio version of Wyplosz is here.

Stefano Micossi argues here that fiscal union is inevitable and urges using the ECB to purchase distressed sovereign debt. Micossi also emphasises the importance of using the EFSF to issue union-bonds backed by the joint guarantee of all Eurozone member states.