Eurozone crisis: what steps should be taken to move forward?

Eurozone crisis: What steps should be taken to move forward?

Opinion piece (The Voice of Russia)
20 June 2012

Interview with Simon Tilford – chief economist at the Centre for European Reform coming to us all the way from London.


I think a more deeply integrated financial architecture is possibly a solution. One of the reasons why the crises ran out of control in the eurozone is that bank in particular member states have a sole responsibility as the member states wherever within the eurozone as a whole. If we compare that with another big monetary union the United States, it is quite different. So, had for example the eurozone banks been protected or backstopped at the eurozone level rather than on the national level, we would have avoided the crisis in Ireland, we would have probably avoided the worst of the crisis in Spain. Now, what's happening is that unconfidence in the banks is undermining confidence in public finances as in turn weakening confidence in public finances is weakening investor's faith in the banks. And this is a sort of vicious circle that they need to break. So, shifting responsibility for backstopping banks from the national level to the eurozone level would help but it won't in itself be enough.


What needs to be done?

What needs to be done as a matter of urgency is for the European Central Bank to go into the market and buy a very significant amount of government debt, that's of the Spanish, the Italian and etc. in order to dispel fears of default. Until the Central Bank makes it quite plain that these countries will not default the problem will persist. So, what the ECB has to deal up first and foremost is to inject lots of money into financial market, then they need a strategy for the economic growth. Now, that is going to require a number of reforms. One we've already talked about which is a banking sector union. Another will be some form of debt neutralisation. They are going to have to become jointly responsible for one another's debt, up to a certain point at least. They should open the way for a sensible fiscal policies. At the moment what's happening in the eurozone is that countries that are in recession are slashing public spending. All that is doing is weakening our economies further, undermining confidence in the banks and in the sovereigns, in the governments. That's got to stop.


What the eurozone is going to need going forward is a much more flexible Central Bank that doesn't just target inflation but has a broader mandate in that, it has a mandate for levels of economic activity, not just a very narrow inflation mandate. One way of doing that which is, be it to have a higher inflation target, at the moment, first, the inflation target is too low and secondly the mandate is very, very narrow. I think it is very difficult to imagine particular member states of Europe agreeing to give the ECB a similar mandate the US had which is price stability plus the economic growth. But I think at the very least what the eurozone is going to need is going to be a higher inflation target because 2% for group of economies not that too genius is simply too low.


Mr Tilford, thank you so much. And just to remind you our guest speaker was Simon Tilford – chief economist at the Centre for European Reform talking to us from London.