穿越欧洲雷区之路

Earlier this week, a group of almost 100 prominent Europeans delivered an open letter to the leaders of all 17 eurozone countries. The letter said, in so many words, what the leaders of Europe now appear to have understood: they cannot go on “kicking the can down the road.” And, just as importantly, they now understand that it is not enough to ensure that governments can finance their debt at reasonable interest rates; they must also address the weakness of Europe’s banking system.

Indeed, Europe’s banking and sovereign-debt problems are mutually self-reinforcing. The decline in government bond prices has exposed the banks’ undercapitalization, while the prospect that governments will have to finance banks’ recapitalization has driven up risk premiums on government bonds. Facing the prospect of having to raise additional capital at a time when their shares are selling at a fraction of book value, banks have a powerful incentive to reduce their balance sheets by withdrawing credit lines and shrinking their loan portfolios.

Europe’s leaders are now contemplating what to do, and their next move will have fateful consequences, either calming the markets or driving them to new extremes. All agree that Greece needs an orderly restructuring, because a disorderly default could cause a eurozone meltdown. But, when it comes to the banks, I am afraid that the eurozone’s leaders are contemplating some inappropriate steps.

Specifically, they are talking about recapitalizing the banking system, rather than guaranteeing it. And they want to do it on a country-by-country basis, rather than on the basis of the eurozone as a whole. There is a good reason for this: Germany does not want to pay for recapitalizing French banks. But, while Chancellor Angela Merkel is justified in insisting on this, it is driving her in the wrong direction.

Let me stake out more precisely the narrow path that would allow Europe to pass through this minefield. The banking system needs to be guaranteed first, and recapitalized later. Governments cannot afford to recapitalize the banks now; it would leave them with insufficient funds to deal with the sovereign-debt problem. It will cost much less to recapitalize the banks after the crisis has abated and both government bonds and bank shares have returned to more normal levels.

Governments can, however, provide a credible guarantee, given their power to tax. A new, legally binding agreement – not a change to the Lisbon Treaty (which would encounter too many hurdles), but a new agreement – will be needed for the eurozone to mobilize that power, and such an accord will take time to negotiate and ratify. But, in the meantime, governments can call upon the European Central Bank, which the eurozone member states already fully guarantee on a pro rata basis.

In exchange for a guarantee, the eurozone’s major banks would have to agree to abide by the ECB’s instructions. This is a radical step, but a necessary one under the circumstances. Acting at the behest of the member states, the ECB has sufficient powers of persuasion: it could close its discount window to the banks, and the governments could seize institutions that refuse to cooperate.

The ECB would then instruct the banks to maintain their credit lines and loan portfolios while strictly monitoring the risks they take for their own account. This would remove one of the two main driving forces of the current market turmoil.

The ECB could deal with the other driving force, the lack of financing for sovereign debt, by lowering its discount rate, encouraging distressed governments to issue treasury bills, and encouraging the banks to subscribe (an idea I owe to Tommaso Padoa-Schioppa). The T-bills could be sold to the ECB at any time, making them tantamount to cash; but, as long as they yield more than deposits with the ECB, the banks would find it advantageous to hold them. Governments could meet their financing needs within agreed limits at very low cost during this emergency period, and the ECB would not violate Article 123 of the Lisbon Treaty.

These measures would be sufficient to calm markets and bring the acute phase of the crisis to an end. Recapitalization of the banks should wait until then; only the holes created by restructuring the Greek debt would have to be filled immediately. In conformity with Germany’s demand, the additional capital would come first from the market and then from individual governments – and from the European Financial Stability Facility only as a last resort, thereby preserving the EFSF’s firepower.

A new agreement for the eurozone, negotiated in a calmer atmosphere, should not only codify the practices established during the emergency, but also lay the groundwork for an economic-growth strategy. During the emergency period, fiscal retrenchment and austerity are unavoidable; but, in the longer term, the debt burden will become unsustainable without growth – and so will the European Union itself.