Tuesday, May 29, 2012

Separate coffers in Europe








This suggestion for a "Euro light" solution was never adopted by the Euro-countries. Instead he Euro-countries decided to increase their mutual risk-exposure - a path which leads to much more integration. 


29 May 2012

Create separate coffers in Europe

By: Karsten Riise

The countries of Europe are on track to take unlimited risks on behalf of each other. Richer countries
are so scared of the problems in Greece, Portugal etc. that they provide enormous guarantees to the
indebted countries. Also, the European Central Bank (ECB) takes huge risks on its balance sheet buying unknown amounts of Greek and Italian debt. To this comes talk of an EU ´Growth Pact´ with additional big expenditures and guarantees. The total EU budget can soon be added as a loan guarantee, and the public is kept ignorant of the over-all inter-country risk-picture.

The European Union´s help to fellow Europeans is on way to add more to collective risk than to safety.

It is necessary to construct Europe in a way, that EU countries and institutions basically maintain
separate coffers -- but within one overall system. Italy and Greece must still have the freedom to go
bankrupt, the Euro-system simply must be made robust enough to handle that.


Early US experience relevant for the EU
In the 1840´ies, the USA, let 9 of its states fall into bankruptcy. The 9 bankrupted states represented a
quarter of the American population, corresponding to a bankruptcy in Italy, Spain, Portugal, and
Greece at the same time(*). As we all know, the dollar still exists -- the dollar survived the bankruptcy of so many states.

The Euro with necessary precautions can also become robust enough to resist a similar bankruptcy among any or all of the European Union´s debt-loaded countries.

The ECB must elaborate two action plans: The first action plan must be carried out immediately. The
ECB must identify and map out all direct and indirect EU and inter-country guarantees and risks.
Based on scenario-analyses, the ECB must then implement a goal-oriented reduction and management of all EU and inter-country risks. The second ECB action plan must be an emergency
plan with IT-support, how to cut-off from the Euro-system any country on the verge of bankruptcy.

The financial markets must be made to trust, that any country in Europe (even Germany) safely can
be cut-off from the Euro-system at the push of a button.


Karsten Riise
Partner & Editor

CHANGE NEWS &
CHANGE MANAGEMENT

(*) See Centre for European Policy Studies 30 April 2010: Learning from the US experience.