Financial Times
May 27, 2012
We have reached bifurcation point – the time to make a decision. If Greece were forced to abandon the euro, the eurozone would mutate from a monetary union into a loose single currency area. I would then expect a mass withdrawal of foreign investment, a credit crunch and a large sustained fall in economic output. There is no way the eurozone will survive this shock in one piece. The consequences of a withdrawal would also be catastrophic for Greece.
A fiscal union lies in the other direction. But if it is to save the eurozone, it should comprise the following four elements. Not all have to be immediately introduced, but eurozone leaders should commit to them.
First, a eurozone-wide deposit insurance scheme with an unequivocal guarantee that deposits will be repaid in euros even if the host country leaves the eurozone.
Second, a eurozone-funded resolution trust company with the power to force a recapitalisation of the banks – without national veto. It is vital that this includes all banks, not just the biggest, as the most vulnerable happen to be the second-tier banks, such as Spain’s Bankia. The trust needs to be accompanied by a further centralisation of bank regulation and supervision.
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