The Euro dilemma between liquidity and budget discipline – and both goals could be achieved

Date

03 Jan 2012

Sections

Euro & Finance

Greek haircut and saving programs alone do not solve the Euro problem and will result in continued credit crunch that may damage growth in Europe.

Europe’s 500, therefore, proposes an approach that ensures budget DISCIPLINE + LIQUIDITY at the same time and thereby improves the growth prospective in Europe. This means in summary:

• Creditor participation only for foreigners, citizens need to be able to rely on their own country bonds. 

• The EFSF/ECB should buy bonds of Euro governments at market price and make a profit while restructuring with gliding interest schemes.

• EFSF/ECB only need to perform a temporary buffer function. 

• Financial markets will refocus on the real economy and have no more reason to freeze in paralysation like some bond markets.

• The Euro zone can give itself the same global capacity to act like the US and China. 

The haircut alone waived the option of creating a flexible instrument that encourages budget discipline. We expect strong or passive resistance against recapitalization because it dilutes shareholders.  A legal framework is missing to oblige banks to replenish their equity in order to maintain its lending capability. Therefore, we expect a credit crunch for domestic capex financing which in the long-term has damaging consequences. 

Therefore, Europe’s 500 entrepreneurs for growth propose:

Creditor participation (for banks, institutions and individuals) should be limited to foreign lenders/investors instead of asking creditor participation from everyone. This risk should be limited to foreign investors who wanted to benefit from higher interests than in their own countries. 

ECB funding of the EFSF for maintaining bond market liquidity still allows incentives and penalties to enforce budget discipline. We should now learn from the positive experience of keeping the banks liquid in 2008 by now keeping the governments liquid. THE MARKETS LOGICALLY NEED TO HEAR THAT THE EFSF (backed by the ECB) MAY BUY GOVERNMENT BONDS AT MARKET PRICE IF THEY HAVE DROPPED TO THE EXTENT THAT FRESH PRIVATE SECTOR FINANCING DRIES OUT.

EFSF intervention should be decided from time to time, but this should be the job and the competence of the institutions. Politicians should rely and empower the experts. The EFSF can then negotiate and reschedule certain government debts. New bonds could be issued in exchange to the maturing bonds. Citizens from the respective countries will buy the new bonds and all three parties can benefit from the discounted bond price: the stretched government, the EFSF and the local citizen. “The looser is the international lender. Local responsibility will grow like you can see it in the financially strong nations”, says Martin Schoeller, President of Europe’s 500, the association of the European growth companies.

Contact: 

Martin Schoeller

President Europe’s 500 

email: petra.stadler@europes500.com 

Tel: +49 89 55277 106