Abstract
Policy brief
The policy brief proposes bold measures to overcome the sovereign debt crisis in Europe. The paper proposes:
steps towards stricter economic governance for the eurozone and those Member States willing to participate;
the creation of a European Debt Agency and the issuance of European Debt Certificates;
the implementation of measures which look beyond debt reduction and will lead to higher economic growth.
The measures towards real economic governance for the eurozone and those Member States willing to participate are meant to ensure that the eurozone develops towards an optimal currency area. Stricter economic governance mechanisms are needed to ensure economic convergence. The policy brief proposes the following measures:
Strengthen the macro-economic surveillance procedure recently decided upon, and ensure its symmetry.
Develop a European Unit Labour Cost norm. Convergence of unit labour costs leads to smaller imbalances and improved competitiveness.
The establishment of an Admonitory Budgetary Compliance Committee’ (ABC+) within the ECOFIN council. The ABC+ could propose measures to national parliaments related to the sustainability of their sovereign debt.
The policy brief proposes the creation of a European Debt Agency (EDA) in order to mitigate the debt default of any Member State. This agency would function on the basis of an external and an internal (differentiated) interest rate. The EDA would issue European Debt Certificates (EDCs) on the international capital market which would only become effective for new debt. The external rate is expected to be the weighted average of the interest rates of the eurozone members, but may be less, due to high demand and low overall risk of default. Proceeds from this borrowing would be loaned to the Member States at an internal interest rate which would be differentiated:
For distressed countries, the internal rate would yield a premium on the external rate. This internal rate would capture differences in the sustainability of public finances (level and evolution of debt and deficit) and the willingness to apply the recommendations of the economic governance (the ABC? recommendations).
Strong countries would not be sanctioned: their respective internal interest rate would be below the external rate.
In addition to the core proposals the policy brief discusses measures for welfare and job creating growth, given that markets doubt the debt sustainability of some economies because of their low prospects for growth.
This policy brief proposes going beyond austerity to take measures which extend beyond those decided upon within EU2020 and the Euro+pact:
Increase the level of private and public investment in (higher) education, research and development.
Shift taxes away from labour. The policy brief proposes a revenue-neutral, growth-oriented tax reform.
Decrease the number of workers hired on temporary contracts.
Increase the number of hours worked in return for a wage increase.
Increase private equity funding and use EIB funding.
Improve Single Market functioning in the following areas: the energy sector, the labour market and the digital market.
Conclusion
The advantages of the euro outweigh the costs, but more economic and fiscal integration, as well as stabilizing measures, are necessary to ensure the full benefit of these advantages.