The Best Way the U.S.

Can Help Europe out of Its Mess

By Peter Charles Choharis June 21, 2012 This article is by Peter Charles Choharis, a principal in Choharis Global Solutions, an international law and consulting firm that represents both U.S. investors and foreign governments on a range of foreign investment issues. He is an adjunct fellow at the American Security Project and a visiting scholar at the George Washington University Law School. President Obamas call for bold and decisive action at the G20 summit this week followed his earlier advice that Europe inject capital into weak banks and lay out a framework and a vision for a stronger Eurozone, including deeper collaboration on budgets and banking policy, and his affirmation that it is in everybodys interest for Greece to remain in the Eurozone. While admirable, these prescriptions are no longer either sufficient or attainable. Nor can they give Europe what it most needs: certainty, finality, and real economic reform. To date, the European Central Bank has purchased 212.1 billion in sovereign debt and bailed out European banks with more than 1 trillion in 1% loans. The ECB knows that cutting the benchmark rate to 0.5% and buying more distressed debt will not work, given how much has already been pumped into Eurozone banks. And while sovereign borrowing is getting expensive, the problem is too much debt, not insufficient capital for purchasing bonds. The total cost of a Spanish bailout alone could be 350 billion ($441 billion) over the next three years, on top of the 100 billion that Spanish banks were recently promised. But the remaining assets of Europes bailout facilities total only 500 billion, with some of that not available until 2014. The Eurozone no longer has the credit or credibility to bail out Spains banks and government, restructure Greeces unsustainable workout, assist Ireland and Portugal, likely bail out Cyprus, fend off attacks on Italys 1.9 trillion of debt, and possibly aid Belgiumand thats a list that will likely grow. Also, the opportunity for greater governmental integration and fiscal unity through eurobonds or Eurozone debt guarantees no longer exists. A popular backlash has spread from periphery countries to France, the Netherlands, and even Germany, making it impossible for leaders to adopt such measures as a unified banking authority.

The result is that the worlds largest economic area is frozen, with no fiscally or politically viable options and no institutions that can impose any. Rather than fiscal unity and bailouts, the United States should promote two new institutional frameworks that offer finality and reform. Eurozone exit. For months, Spanish, Italian, and other periphery depositors have been fleeing southern Eurozone banks by transferring their euro deposits to the safe havens of northern banks, in fear of losing their savings if they are converted to a discounted national currency. Bloomberg estimates that Spanish, Italian, and other periphery depositors have transferred 789 billion to banks in Germany, the Netherlands, and Luxembourg. Thus while periphery governments are borrowing hundreds of billions to recapitalize their failing banks, their depositors are depleting those banks reserves by shifting currency abroad. Leaving the Eurozone would allow countries to devalue their currencies, lower their labor costs, and make the costs of their goods and services more competitive. Although their costs of borrowing would rise in the short-term, countries like Greece would be forced to improve their tax systems even as the tax base expanded from higher exports and economic growth. The challenge for the Eurozone is to construct an equitable, transparent, predictable, speedy transition procedure that minimizes the risks for exiting countries and the region as a whole. The procedure must also be standardized, so that citizens and creditors can understand the potential risks, costs, and benefits. Sovereign bankruptcy. The United States can also help establish a sovereign default facility under the auspices of the International Monetary Fund to allow countries plagued by insurmountable debt a chance to recover. Sovereign bankruptcy would have no provision for liquidating a countrys assets and distributing the proceeds to creditors, and proceedings could be begun only by countries, voluntarilynot creditors. But it would allow public, transparent, legal procedures to govern, and yield final results that would end the need for future bailouts and limit the risk of regional contagion. A full-fledged mechanism will take time to design and implement, but the U.S. can play the role of an honest broker to shape and potentially administer an expedited bankruptcy process, perhaps based on Chapter 9 of the U.S. Bankruptcy Code for municipal bankruptcies. Enabling countries to exit the Eurozone and declare bankruptcy may result in significant economic and social dislocations. Estimates for the cost of an exit from the Eurozone by Greece alone range from 150 billion ($189 billion) to 1 trillion. But these estimates must be weighed against the costs of indefinite bailouts. It will be better to use limited funds and political capital to mitigate the short-term economic and social hardships that may result from countries exiting the Eurozone and declaring bankruptcy, than to deplete those funds and watch the contagion spread. At the least Europeans deserve the choice.

http://www.forbes.com/sites/forbesleadershipforum/2012/06/21/the-best-way-the-u-s-can-help-europeout-of-its-mess/