Germany must lead fightback

by Frank-Walter Steinmeier and Peer Steinbrück

Financial Times
December 14, 2010

The time for stumbling through the euro crisis is over. Piecemeal approaches and wait-and-see attitudes are endangering European integration. We now need a more radical, targeted effort to end the current uncertainty, and provide stronger support for the future of Europe’s common institutions. This must also protect the European Central Bank from becoming Europe’s “bad bank”, and ensuring its credibility and independence in guarding a strong euro.

The required solution is a combination of a haircut for debt holders, debt guarantees for stable countries and the limited introduction of European-wide bonds in the medium term, accompanied by more aligned fiscal policies. These measures would only work together; none alone would restore stability.

For example, we need a haircut for holders of Greek, Irish, and Portuguese debt. But we also must ensure that solvent member states, such as Spain and Italy, are not drawn into the downward spiral of financial speculation. We therefore must simultaneously guarantee the entire outstanding eurozone debt of stable countries, backed by an enhanced rescue fund. Here, eurobonds would send the message that Europe is strong, united and willing to deal jointly with whatever ­critical market situation emerges. But these bonds should only be launched with co-ordinated fiscal policies ensuring common minimum standards.

How would these three measures work? First, Greece, Ireland and Portugal urgently need to be released from a substantial part of their debt. Painful spending cuts and structural reforms alone – of an extent unheard of in modern economic history – will not allow them to escape their debt trap. In the interest of all of Europe, we need to restructure their debt.

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