Ifo President Fuest Demands Far-Reaching Reform of Eurozone
Feb 14, 2017
Ifo President Clemens Fuest has called for a comprehensive reform of the Eurozone. “The Eurozone requires urgent reforms. Procedures and competencies now need to be changed if lasting stability in the currency union is to be achieved,” he said on Tuesday in Berlin at the presentation of his new book “The Odysseus Complex” (“Der Odysseus-Komplex” published in German), co-authored by Fuest and finance expert Johannes Becker from Muenster.
“We seek to provide a clearer definition of the European Central Bank’s mandate: the ECB should focus entirely on monetary policy. Regulations prohibiting state financing should be made even stricter, the European Stability Mechanism should be the only instrument for bailing out states and an independent authority should be set up in the mid-term to supervise the banking sector. The banking sector should become more robust and should be less involved than today in government financing,” noted Fuest.
The ESM bail-out mechanism should depend less on the approval of national governments and should be far more in a position to independently implement previously agreed routine measures. An automatic extension of the duration of government bonds that expire during an ESM programme would prevent creditors from being repaid at the taxpayers’ expense. “If a country is not able to return to the capital market after three years of ESM support, there should be a conference with debt relief to make its debt serviceable in the long term,” said Fuest.
To limit new borrowing, Fuest and Becker propose that states only be allowed to finance 0.5 percent of their annual economic output with normal bonds. Should they run higher deficits, the excess debt should be subordinate i.e. it will only be repaid after other debts, must not be bought by the ECB, and should also only be held by banks with higher equity cover. “That would mean far higher interest on those loans, because the costs of borrowing could not be passed onto other countries. The current subsidising of borrowing via joint liability would be abolished,” noted Fuest.