A lifeline is thrown to the periphery

Ótimo artigo sobre os problemas e dilemas da zona do euro.



One of the main reasons why the measures taken in the eurozone over the last two years have failed to address the crisis is that the decisions were often taken too late. Countries in financial difficulties only sought support when market conditions had deteriorated to a point of no return. Two factors explain their reluctance to request financial assistance from the EU or International Monetary Fund.
The first is political. By asking for external support a government implicitly recognises its incapacity to act autonomously. It has to accept the terms of an adjustment programme designed by a supranational institution and monitored by a group of inspectors (the Troika) that visits regularly. All these constraints impose a domestic political cost on the government.

The second factor is financial. When countries request financial assistance, interest rates on government bonds often rise. The preferred creditor status of the funds provided by supranational institutions discourage private creditors. As a result, the country’s access to financial markets remains impaired for a relatively long time.

These disadvantages explain why countries have applied for assistance only when they had no alternative. This has exacerbated tensions in the financial markets, both before and after countries began an adjustment programme, with huge contagion effects across the eurozone.

The ECB’s recent decisions should help reduce the stigma attached to an adjustment programme. The ECB’s readiness to intervene in the short end of the market to improve the transmission mechanism of monetary policy should reduce uncertainty and avoid the self-fulfilling, destabilising behaviour of financial markets, once a country implements the agreed programme. The ECB’s firepower should be sufficient to significantly reduce the risk of exit from the euro. Giving up preferred creditor status should also help catalyse private sector flows and prevent the country being totally cut off from markets.

There may be uncertainties about these effects, but the ECB could reduce them by not waiting to implement its new policies until more countries request an adjustment programme. It could already apply its policy to countries such as Ireland and Portugal, which have a programme and are “on track”. Indeed, the spreads on these countries’ bonds clearly reflect a systemic risk, including euro exit, and are distorting the transmission of monetary policy.

Acting in such a way would lessen the stigma for other countries to apply for assistance and so alleviate tensions in financial markets.
There are also other ways to lessen the stigma. In the current system, the request for financial assistance is made to the Eurogroup, comprised of the finance ministers of eurozone countries. However, some national parliaments are sometimes allowed to request extra conditions, giving the impression that certain countries – not the European institutions – set the terms of the programme. The Greek or Portuguese programmes being subject to ratification by the German or Finnish parliaments has fuelled resentment at policies being “imposed” by foreigners. This should be avoided, as programmes succeed only when voters accept them.

Further, to reduce the political cost to governments of requesting assistance, adjustment programmes should be underwritten by all major parties, not only those who form the prevailing majority, as was the case in Ireland, Portugal and Greece. This would prevent programmes being reversed directly after elections.

A request for assistance from the eurozone’s rescue funds could be further de-politicised by setting a threshold, in terms of bond spreads (for instance 200 bp, as in the Maastricht convergence criteria), beyond which the procedure would be triggered in a semi-automatic way. This would be analogous to the excessive deficit procedure, which also implies strict conditionality and monitoring and is launched as soon as deficits rise above 3 per cent.

If the survival of the euro requires further political integration, as many suggest, then member states need not only to share more decisions at European level but also to accept more interference by EU institutions in areas previously held to be the preserve of national authorities. Politicians and commentators cannot ask for more Europe, then complain about the loss of sovereignty. The real issue is the democratic legitimacy and accountability of the institution responsible for the relevant decisions – in this case, the Eurogroup. Either the Eurogroup is considered legitimate, or it should be made legitimate, as soon as possible.

Lorenzo Bini Smaghi is a visiting scholar at Harvard’s Weatherhead Center for International Affairs and a former member of the European Central Bank’s executive board