Germany must lead fightback - By Frank-Walter Steinmeier and Peer Steinbrück

<blockquote>'The time for stumbling through the euro crisis is over. Piecemeal approaches and wait-and-see attitudes are endangering European integration. We now need a more radical, targeted effort to end the current uncertainty, and provide stronger support for the future of Europe’s common institutions. This must also protect the European Central Bank from becoming Europe’s “bad bank”, and ensuring its credibility and independence in guarding a strong euro.

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In the case of Ireland, abolishing full state guarantees for private banks would allow their debt to be cut off at the root of the problem, while also letting private investors take their fair share of the burden. A new European framework for bankruptcies of financial institutions should support this. The current rescue programmes, if continued, then provide a firm basis for a return to economic growth.'</blockquote>


Germany must lead fightback

By Frank-Walter Steinmeier and Peer Steinbrück
December 14 2010
Source

The time for stumbling through the euro crisis is over. Piecemeal approaches and wait-and-see attitudes are endangering European integration. We now need a more radical, targeted effort to end the current uncertainty, and provide stronger support for the future of Europe’s common institutions. This must also protect the European Central Bank from becoming Europe’s “bad bank”, and ensuring its credibility and independence in guarding a strong euro.

The required solution is a combination of a haircut for debt holders, debt guarantees for stable countries and the limited introduction of European-wide bonds in the medium term, accompanied by more aligned fiscal policies. These measures would only work together; none alone would restore stability.

For example, we need a haircut for holders of Greek, Irish, and Portuguese debt. But we also must ensure that solvent member states, such as Spain and Italy, are not drawn into the downward spiral of financial speculation. We therefore must simultaneously guarantee the entire outstanding eurozone debt of stable countries, backed by an enhanced rescue fund. Here, eurobonds would send the message that Europe is strong, united and willing to deal jointly with whatever ­critical market situation emerges. But these bonds should only be launched with co-ordinated fiscal policies ensuring common minimum standards.

How would these three measures work? First, Greece, Ireland and Portugal urgently need to be released from a substantial part of their debt. Painful spending cuts and structural reforms alone – of an extent unheard of in modern economic history – will not allow them to escape their debt trap. In the interest of all of Europe, we need to restructure their debt.

In the case of Ireland, abolishing full state guarantees for private banks would allow their debt to be cut off at the root of the problem, while also letting private investors take their fair share of the burden. A new European framework for bankruptcies of financial institutions should support this. The current rescue programmes, if continued, then provide a firm basis for a return to economic growth.

Debt restructuring also has to be accompanied by measures to avoid contagion, making it obvious that the eurozone is indeed our common destiny. Here, Germany should be in the driving seat for more, not less European integration. It is high time to close the gap between financial and political integration in the eurozone. Financial markets expect an unambiguous political signal of the irreversibility of economic and monetary union, and they expect it now. And such a signal could be sent by introducing, in the medium term, new European bonds – although to avoid any moral hazard they should cover only a limited share of public debt.

Germany should support this idea, but only on the basis of more aligned policies in other fields. In the 1990s Europe moved forward with economic integration, but left political integration to follow later. Looking back, we can now see this approach has only increased the difficulties we must deal with today. This means that eurobonds will succeed only if complemented by new, far-reaching political reforms. This means empowering European institutions to establish tighter controls over fiscal and economic stability, alongside common minimum standards on wage and welfare policies, as well as capital and corporate taxation. In short: we need European government bonds, but we must put an end to beggar-thy-neighbour policies and harmful tax competition within the eurozone too.

Back in 2008, at the height of the financial crisis, the courage of politicians prevented international markets from collapsing entirely. The world’s leaders were determined to push through unpopular decisions, for the sake of our long-term well-being. Today, a lack of political courage is endangering the euro. Germany is not innocent in this regard. For the first time in decades, German isolation has become a real concern. Now we need a signal that Germany wants a more European Germany, rather than a more German Europe.

At the next meeting of the European Council, our leaders face a choice: extend the crisis by stumbling through, or regain momentum to end it. Much will depend on the German chancellor. If Angela Merkel is ready for a European solution, she can be assured of broad support, in the Bundestag and beyond, for the sake of our common currency and our common destiny.

The writers were respectively German foreign minister and German minister of finance between 2005 and 2009