by Don Alexander, MBA
Associate, RSD Solutions Inc.
Politics is not the art of the possible.
It consists of choosing between
The disastrous and the unpalatable
(JKGalbraith)
Eurozone officials and politicians have adopted a mini step-by-step approach to crisis resolution. This approach has back-fired as cost of crisis resolution has increased dramatically as the sovereign debt crisis is turning into a full blown banking crisis. The European Central Bank (ECB) finally took a big step last week when they made nearly euro 500 billion in three-year low rate loans available to 500 banks across the region. This comes ahead of a crucial time for policymakers as a large volume of sovereign and bank debt has to be refinanced in the first quarter of 2012. The ECB has provided a near-term fix for the Eurozone crisis, but what has to be addressed longer-term?
Charles Goodhart & Dirk Schoenmaker in “The Political Endgame for the Euro Crisis” (VOXEU, Dec. 14th) discuss some of these issues. The euro crisis is deepening, as European leaders continue with their “too little too late” policy reforms. Solving Eurozone problems requires a strong direction for fiscal and banking policy. This in turn needs greater political integration through an elected president of the European Commission and a two-chamber parliament representing EU citizens and EU member states. The euro has a supranational monetary policy framework, while the fiscal side is still national or inter-governmental. With political legitimacy, the President of the European Commission could: first, enforce budget discipline on participating members and restrict the impact of fiscal spending, and second oversee Eurozone banking supervision and resolution to foster banking system stability. One step is the establishment of a Eurozone Minister of Finance with power to enforce provisions of the Stability and Growth Pact on fiscal deficits. A second step is a reform of the parliamentary side of the political union by establishing one chamber to address issues of the electorate and a second chamber to represent interests of the separate member countries. This would allow a gradual transition of banking supervision and resolution from the national level toward a wider European scale. The new Eurozone Finance Minister would need specific authority from the European Parliament to establish budgetary and banking powers and the European equivalent of the FDIC, SEC, etc. The resolution of the euro crisis needs both political reforms as well as a technocratic solution. There are major issues that need to be addressed, but the min-step approach to financial crisis resolution or risk management has a cost – often a higher cost. For more on this follow the link:
No comments:
Post a Comment