One of the astute ideas, one that was opposed to by Germany, was to use the European Financial Stability Funs (EFSF) as a bank.

Abundance of astute ideas as Turkey had experienced during the late twentieth century is currently experienced by Europe. There is nothing unusual; they are in trouble and they seek a way out. They are aware that as a primary step, troubled countries have to balance their economies. However, this is not enough and the chief solution is to redesign the Eurozone from scratch. They are aware that “centralization” of fiscal policy also is crucial.

But even these might prove insufficient. There exist significant differences of productivity across the Eurozone. Because of this some countries live with current account surpluses while some others constantly suffer from current account deficits. If each country had used their own currency, some part of these differences could have been “swept under the rug” if not solved completely, via exchange rate movements, for instance. But the union has a single currency which makes it impossible to sweep the dust under the rug. Therefore, there is need for reforms that will reduce the productivity differences. Of course it is easy to write about it. But it is doubtful whether the specific steps needed to be taken are identified. Even if they are, it is politically difficult to initiate them.

The patient in the emergency service

Even accomplished, the mentioned reforms will give fruits in the medium term at best, but the patient is bleeding. The recommendation “You should give up smoking and drinking” will not work; it is first necessary to stop the bleeding. This is the main and understandable reason why there is an abundance of “astute ideas.” The patient is in the emergency service and immediate steps are necessary.

One of these ideas, one that was opposed to by Germany, was to use the European Financial Stability Funs (EFSF) as a bank mechanism. This way, this “bank” could be able to issue its own bonds (with the assumption that non-European countries in particular – China for example – will be willing to purchase these bonds) and use the money generated to purchase the sovereign bonds of the troubled countries. At the next step, it would be able to borrow cash from the European Central Bank (ECB), submitting these bonds as collateral. Then, it would be able to purchase bonds of troubled countries the interest rate on which tended to increase continuously and thus which was not demanded by anyone. In the end, this bank would have the bonds of troubled European countries as assets, and its capital, bonds sold to China and similar countries and cash debt to the ECB as liabilities. The “astute” part of the story leaving aside the plan to sell troubled bonds to China and other possible creditor countries is to indirectly create the opportunity to borrow from the ECB and purchase the bonds of troubled countries with issuing currency indirectly.

Special drawing rights

The second idea is not as “astute” as the first one; it was discussed before during the first years of the global crisis. Experts had prepared several reports on this issue for the IMF. Countries have “special drawing rights” at the IMF. There is an upper limit for the amount to be drawn from this asset, identified on the basis of the size of the economy. Roughly, to issue money, central banks have to either extend loans to public or to banks, or purchase foreign exchange. You can consider the special drawing right as foreign exchange. It might be thought that issuing money in exchange for foreign exchange is less problematic. The idea takes departure from this supposition. For instance, the countries in the Eurozone can transfer their special drawing rights to the EFSF, which can convert these rights into cash via the ECB. The liquidity can be used to purchase the bonds of troubled countries. Germany has opposed to this option, as well.

Meanwhile, even in the hours this commentary was being written, when the markets have recovered though slightly compared to Tuesday, interest on Germany’s ten-year bonds was 1.8 percent whereas that on Italy’s was 6.8 percent. More importantly, the interest on ten-year bonds of France was as high as 3.56 percent. Caution, I am talking about France!

This commentary was published in Radikal daily on 17.11.2011