Time to shift out of crisis mode, Europe
Tomorrow, Dutch elections and the German Constitutional Court's decision on the eurozone bailout fund have the potential to shake up the plan for Europe's debt crisis – again. Europe must shift away from piecemeal, stopgap measures and set the framework for a true banking union.
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As the euro-crisis has simmered along, boiling up from time to time, a precarious crisis routine threatens to creep in – one based on piecemeal solutions and stopgap reactions. For sure, contingency plans for some scenarios have been drawn up in finance ministries across the continent. For example, according to newspaper reports, a special working group in the German government has been calculating the costs of a Greek exit from the eurozone. But a so-called Grexit is only the most obvious of a number of potentially harmful developments.Skip to next paragraph
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Whether contingency plans can take into account all possible scenarios remains questionable. External shocks such as a hard landing of the Chinese economy or internal surprises like an unexpected decision by the German court could cause major instabilities that may well unravel the current crisis response. A further slip toward a purely reactionary crisis-management routine therefore must be avoided.
Over the past few years, European policy makers have come a long way in reshaping the eurozone’s institutional framework and correcting some of its original design flaws. It is now time to finalize these arrangements. This will not necessarily require the creation of a European nation state.
Instead, Europe needs a fully functioning safety mechanism; a true banking union, agreed to in principle at the EU summit in June; and further support for troubled countries to lower their debt burdens. The European Central Bank’s newest announcement of potentially unlimited bond purchases offers some breathing room and further assurance. But the other pieces of the puzzle must soon fall into place. The next few months, including the October EU summit, should be used to complete the new framework.
A first hurdle could be cleared tomorrow, if the German judges accept the legality of the European Stability Measure. In a next step, a eurozone-wide banking union must be established to break the fatal link between weak banks and troubled states. This means creating a new authority with supervision, rescue, and, if necessary, resolution powers over all major eurozone banks. At a later stage, a joint deposit insurance scheme will likely have to be added.
Over the past years, onlookers and officials have said "this is the summit" that will solve Europe’s crisis and put in place the mechanisms to prevent future ones. So far, these summits have all come and gone, and the crisis continues. Amid the questions and changes on the docket for this fall, now is the time for Europe to take the decisive steps in finalizing its monetary union – for the sake of the euro’s survival and much of the global economy.
Peter Sparding is a transatlantic fellow for economics at the German Marshall Fund of the United States. The views are the author's alone.