Getting there, slowly though

by Charles Wyplosz

Vox
December 9, 2011

The night of Thursday 8 December saw a meeting to save the euro. Judging by reactions Friday morning, there is some way yet to go, but this column argues that Europe is getting there, slowly. A significant step has been made in the right direction; the principle is right but the details are missing.

This week’s Eurozone summit has taken two important steps. As always, however, these are laced with vagueness and reiterations of commitments to uphold previous failures.

The key achievement is the prominent decision that will require every Eurozone country to adopt a constitutional balanced-budget rule. Will that be enough to convince the ECB to act as lender of last resort? Maybe.

The second important step, which is irrelevant to the crisis, is the spectacular decision to adopt a ‘two-speed’ model in the EU. In a sense, this was inevitable given the size of the EU and being to an extent still shaped by its origins as a six-country undertaking. As it stands now, Britain has a financial model that emphasises the role of markets while the continent emphasises banks. A great deal of research has looked at the superiority of one model over the other without coming to concrete conclusions. It stands to reason that each country should be free to choose its model. This freedom of choice is also likely to concern other areas like taxation or labour markets.

With regard to the crisis, the beginning of the end requires three steps:

1. A backstopping of sovereign debts by the ECB;
2. A credible commitment to fiscal discipline over the next 50 years or so in order to reduce existing debts to comfortable levels;
3. Debt restructuring.

The summit has moved seriously on the second step, which makes the first step more plausible but, unfortunately, appears to have backtracked on the third. As always, however, vagueness prevents us from drawing firm conclusions.

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