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Forget about Reaching a Deal with Greece, Europe Needs a deal with... Europe!

Politics / Eurozone Debt Crisis Jul 10, 2015 - 11:55 AM GMT

By: Atlantic_Perspective


Mathematically speaking, Greece needs debt relief. There´s no other option. The country can´t pay back its debts. But there is a nasty “but” in this statement...
If Europe lets Greece off the hook, then all the other “emerging Greeces” of the UE will want the same. Far-left governments would start winning elections all over the place, starting with Portugal and Spain - just a few months away from electing a new government. And that would be the end of the European Union.

Is there a way to fix this problem permanently?
Instead of reaching a deal with Greece, Europe needs to create a European wide mechanism to deal with bankruptcies and pre-bankruptcies, ensuring that troubled countries do get help, while making sure that moral hazard is totally impossible.

How can this be done?
By establishing debt thresholds that immediately activate pre-defined measures. These measures would be exactly the same in all countries, thus avoiding negotiations. If A happens, B ensues. Immediately.

Specific examples:
The European Union should create 3 debt thresholds, using the debt to GDP ratio as reference. Example: 90%, 120% and 150%. This mechanism would be applicable immediately, using today´s situation as benchmark. This would avoid manipulation to artificially get above or below any threshold.

How would it work?
Countries would be automatically forced to adopt cost cutting measures, according to the debt to GDP ratio threshold they are in. And these cuts would not be negotiated. They would be forcefully applied using fixed ratios.

Countries with a debt to GDP ratio of 90-119%:
Maximum allowed expenditure on defence: calculated according to the average defence to GDP expenditure in the 7 EU countries with the lowest defence to GDP budget.
Maximum allowed expenditure on education:  calculated according to the average education to GDP expenditure in the 7 EU countries with the lowest education to GDP budget.

For each debt to GDP threshold (90%, 120% and 150%), the same method would be applied. But instead of using the average of the 7 countries with the lowest expense on that specific budget item, the number would be calculated using the average of just 5 countries in the second debt threshold, and just 3 countries in the last debt threshold.

What´s the rational behind this measure?
A country with debt problems should not be allowed to spend more than others in specific areas. The average of 7, 5 or 3 countries, smooths down any freak spending occurrences that may exist, particularly in smaller countries.
The defence spending item in particular is very important. Greece has a ridiculously high defence budget. The country could be doing a lot better if its bloated defence budget came down in line with the country´s financial possibilities.

This system avoids the long, complex and often fruitless negotiations, and replaces them with an objective method of getting finances in order.

This system is also tamper proof, and deals with one of the biggest problems in European politics: laws tailor made to fit the most powerful countries. By using simple averages, there is no way to steer the process in this or that direction. The direction is always clear.

Using this approach, it wouldn´t be necessary to negotiate plans for any specific country. This is a European wide plan that prevents countries from getting too much in debt. Moral hazard will not be rewarded.

What if a country refuses to implement the automatic measures?
No more European Funds, no bailouts, no ECB assistance. Solidarity stops when obligations are not met.

And how can this help Greece?
In the last debt to GDP threshold (above 150%), the European Union would be forced to pardon an amount of debt big enough to bring the country´s debt to GDP ratio to, for instance, 145%. This would automatically bring down the country to a lower debt threshold. And from there, the country would have to implement the budget cuts associated to the terms defined for the second debt threshold.
Europe needs more actions and less negotiations. In the military, there are automatic protocols to ensure a timely response to threats. Running a country is not like running a war. But in the economic/financial sphere, when alarm bells ring immediate action is necessary. Endless negotiations usually allow the problems to grow, and the outcome is often a senseless incoherent package, forged by worn out politicians, willing to accept anything just to be able to move on and finally get some sleep.

What are the chances of this proposal ever being applied?
None. That´s the Atlantic Perspective.

Copyright © 2015 by The Atlantic Perspective.

The Atlantic Perspective is an opinion blog, aimed at explaining and providing solutions to some of the world´s most relevant issues.

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