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The Euro Zone's Double Failure
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Martin Feldstein says the eurozone summit of Dec. 9, 2011, was a failure because the plan for closer economic integration and financial discipline does not address the immediate problems of increasing bond yields for Italy and Spain. The summit concluded with decisions to set up a constitutional rule for each euro-zone country to balance its budget, take corrective action if the "structural" deficit exceeds 0.5% of GDP, and impose penalties if the actual deficit is larger than 3% of GDP. German chancellor Merkel wanted to have these rules put in a revised version of the EU Treaty, enforceable by the European Commission through the European Court of Justice. With Britain not agreeing to accept the plan without safeguards it requested, the new rules apply to the eurozone only, are not part of a revised Treaty and are not enforceable by EU institutions. Feldstein says it is wrong to have a common solution for Italy and Greece. For Greece the best option is to go back to the drachma, because of its shrinking economy and high debt load, and the need for a competitive currency. Italy, he says has a good chance of convincing investors to lower yields by taking strong steps. Italy's fiscal deficit is 4% of GDP, and the IMF projected Italy would have a balanced budget in 2013. How should Italy plan for the 300 billion euros of Italian bonds that need to be sold in the next 12 months? Feldstein says only 40 billion euros are needed to finance the projected budget deficit and for the rest is for existing bonds to be rolled over when they are due. Italy can repay the maturing debt with new bonds and not cash. And Italy can get the help of the IMF for some of the funds needed. On the issue of the ECB engaging in large scale buying of Italian and Spanish government bonds, Feldstein says Mario Draghi is doing the right thing by rejecting French proposals to do this, because this would be against ECB rules in the Maastricht Treaty to bailout governments and would reduce the incentive to make changes in Italy and Spain for lower deficits.
Martin Feldstein on the Euro currency and the European Union in 2011-2012
12/15/2011
Feldstein on the efforts to solve the eurozone debt crisis and the vision of a united Europe.
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Spain kept its deficits below the 3% mandated under EU treaties, till recently. Asset bubbles sustained because of bad lending by a country's banks and easy acess to credit from outside the country, are two problems not addressed by tighter budget controls in the revised rules being set after the Dec. 9 EU Summit. Spain's debt problem is to recapitalize these failing banks and debt of regional governments. Spain relied too much on a construction boom for growth, with productivity stalled. Ireland improved competitiveness and attracted foreign investment. This too unraveled in the face of an asset bubble from speculative lending by its banks.
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Draghi addresses the issue of large scale purchases of bonds of Italy and Spain to ease pressure on bond yields, by leaving open the possibility of action if the EU countries take the necessary steps for a strict budgetary framework.
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The EU Summit, December 9, 2011
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Grouped Articles
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Grouped Articles
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The Sarkozy-Merkel meeting in Deauville, France, October 18, 2010, that sets the stage for a closer union for the EU.
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Germany and France make the momentous decision to move forward with a closer fiscal union of the 16 nation European Union. The efforts to build anew the conditions for the Euro to succeed. The vision of a united Europe persists.
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Martin Feldstein on why the "Fiscal Compact" agreed to in December 2011 by EU countries is a failure
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Linked Articles
Europe Needs the Bond Vigilantes
Wall Street Journal 04/05/2012
The Euro Zone's Double Failure
Wall Street Journal 12/15/2011
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