ING IM calls for six major steps to address eurozone crisis

ING Investment Management has outlined its six step master plan for addressing and resolving the eurozone crisis.

First, a better diagnosis of the origin of the crisis is needed. The root cause of the crisis resides in the creation of unsustainable imbalances on the current accounts of member states in the eurozone. These infected not only public sector balance sheets, but also private (financial) sector ones in peripheral Europe. A solution should therefore cure this infection in both public and private sectors and create a policy mechanism that prevents these current account imbalances to be built up to such an extent.

Second, it has to be accepted that costs for mistakes made in the past will have to be digested. The euro has always been a political project and politicians in both the North and the South need to acknowledge their responsibility for the set-up of this project. With the latter comes the acceptance to the financial and political costs of cleaning up the mess that the euro project finds itself in today. Only once that is done and the current debt overhang in the periphery is further reduced by write-downs in public sector loans, is it possible to create a new and credible starting position for the region as a whole to start functioning and grow again.

Third, the least painful solution to the current problems is found through further political and economic integration. This would mean that the monetary union would need to be broadened to include a “banking union” that consists of unified European banking sector governance, a resolution mechanism and a euro-wide deposit guarantee scheme. Next to this a true political union would need to be set-up that allows for real fiscal integration (European Ministry of Finance of some sort) whereby taxation, representation and, in the end, debt issuance (“eurobonds”) in some shape of form are genuinely centralised at a European level.

Fourth, the eurozone needs an even better fire-wall. Contagion risks through both financial markets and confidence amongst households and companies remains very high. This can only be addressed with a credible “shock and awe” ability to provide short-term liquidity to the system, and the ECB’s balance sheet is the only one that can provide that. This could probably be done most easily through the ESM by giving it a banking license.

The long run inflationary risks associated with such an undertaking are clearly less urgent and most likely easier to combat with the ECB’s existing toolkit than the existential threat that the eurozone is faced with today. One wonders how long a “mother” can refrain from providing antibiotics to fight of the current infection that is at risk of killing the euro “child” on the back of fears for long-tern health risks (inflation) that the medication might create.

Fifth, a near-term growth strategy is needed. Single minded and coordinated austerity has proved to be self-defeating over the last two years. It should be replaced by a coordinated investment strategy, say a Marshall Plan 2.0 that would have to be funded by those who can. ING IM stresses that it should not be forgotten that despite all the talk of the need to impose austerity immediately, the North of Europe is funding itself at negative real interest rates currently.

Sixth, on-going structural reform should be pursued. The investment manager says an incentive scheme should be designed that will credibly safeguard the persistence of structural reform in all member states of the eurozone in labour, product and goods markets. Next to that, it says pension and healthcare schemes should be adjusted if funding cannot be guaranteed. To achieve this at least a decade-long reform effort will have to be initiated that is incentivised by both carrots and sticks. ING IM says one can think of a combination of future prospect of participating in a Eurobond scheme once certain reform objectives are met (carrot) and financial and/or political penalties agreed once reform targets are missed (stick).

 

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