穿越欧元区雷区的路线图

A group of almost 100 prominent Europeans delivered an open letter to the leaders of all 17 eurozone countries on Wednesday. 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”. The road has been blocked by the German constitutional court which has found the law establishing the European financial stability fund constitutional, but declared that no further transfers are allowed without Bundestag authorisation. The leaders have also understood that it is not enough to ensure that governments can finance their debt at reasonable interest rates, they must also do something about the banking system.

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

The financial markets are now anxiously waiting for the leaders’ next move. Greece clearly needs an orderly restructuring because a disorderly default could cause a meltdown. The next move will have fateful consequences. It will either calm the markets or drive them to new extremes.

I am afraid that the leaders are contemplating some inappropriate steps. They are talking about recapitalising the banking system, rather than guaranteeing it. They want to do it country-by-country, rather than for the eurozone as a whole. There is a good reason for this. Germany does not want to pay for recapitalising the French banks. While Angela Merkel is justified in her insistence, 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 recapitalised later. National governments cannot afford to recapitalise the banks now. It would leave them with insufficient funds to deal with the sovereign debt problem. It will cost the governments much less to recapitalise the banks after the crisis has abated, and both government bonds and bank shares have returned to more normal levels.

The governments can however, provide a guarantee that is credible because they have the power to tax. It will take a new legally-binding agreement for the eurozone to mobilise that power, and that will take time to negotiate and ratify. To be clear, I am not talking about a change to the Lisbon Treaty but a new agreement. A treaty change would encounter too many hurdles. In the meantime, the member states could call upon the European Central Bank– which already enjoys their guarantee on a pro-rata basis– to step into the breach.

In exchange for a guarantee, the major banks would have to agree to abide by the instructions of the ECB. This is a radical step but necessary under the circumstances. Acting at the behest of the member states, the central bank has sufficient powers of persuasion. It could close its discount window to, and the governments could seize, the banks that refuse to co-operate.

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 main driving forces of the current market turmoil.

The other driving force – the lack of financing for sovereign debt – could be dealt with by the ECB lowering its discount rate and encouraging countries in difficulties to issue treasury bills and prompting the banks to subscribe. The bills could be sold to the central bank at any time, so that it would count as cash. As long as they yield more than deposits with the ECB, the banks would find it advantageous to hold them. In this way, governments could meet their financing needs within agreed limits at very low cost during this emergency period, yet article 123 of the Lisbon Treaty would not be violated. I owe this idea to Tommaso Padoa-Schioppa.

These measures would be sufficient to calm markets and bring the acute phase of the crisis to an end. The recapitalisation 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 the German demands, the additional capital would come first from the market and then from the individual governments. Only in case of need would the EFSF be involved. This would preserve the firepower of the fund.

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 a growth strategy. During the emergency period fiscal retrenchment and austerity are unavoidable. But the debt burden will become unsustainable without growth in the long term – and so will the European Union itself. This opens up a whole new set of difficult but not insurmountable problems.