How to solve European debt crisis? Create a European treasury to back EU bonds

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Create a European treasury

This scenario can still be avoided if we act now before the dominoes start to tumble. The solution is quite clear. The ECB must be backstopped by a European fiscal authority with several indispensable instruments: the ability to issue European treasury bonds and raise federal taxes, and the capacity for decisive action at the European level.

The European Union is the only sovereign entity without the capacity to borrow in private markets by issuing treasury bonds. If we are going to build our way out of this systemic crisis instead of urgently plugging gaps, the European edifice must be put on a more solid foundation through the authorization of such bonds together with the creation of a European Treasury entrusted with their management. The budget for this institution would be funded by its borrowings and by taxes.

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In this way, the European Union as a single entity could assume a part of the public debt of its member states, up to 60 percent of its total GDP.

At this time, the EU is entirely debt-free, which gives it a considerable margin of maneuverability. The loan-service costs of the new EU treasury bonds would be lower than the costs of the bonds issued by individual member states. Member states could transfer to the Union the funds necessary to finance that debt service. As long as no such budgetary federalism exists, the common European currency – the euro – will continue to become more fragile.

The present situation in Europe is far from new. History teaches us that sovereign debt crises usually seal a nation’s decline, especially if it has tried for too long to maintain its standard of living by excessive borrowing. Thus, the dangers of the present crisis for the future of Europe should not be taken lightly.

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However, history also teaches us that, since its inception, and in each time of crisis, the European Union was always able to find a solution by taking the high road. First the common market and then the common currency were both born out of a common resolve to overcome difficult situations.

There is every reason to believe that again today, when push has come to shove, Europe will rise to the challenge.

Jacques Attali, founding president of the European Bank for Reconstruction and Development, now heads PlaNet Finance. Haris Pamboukis is minister of state to the prime minister in Greece.

© 2010 Global Viewpoint Network/Tribune Media Services. Hosted online by The Christian Science Monitor.

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