The euro zone’s bond and bill markets would complement but not replace individual states’ existing government bond markets. They would be under the control of euro-zone finance ministers. The regulation of the financial system would then be put in the hands of the European Central Bank, while the task of guaranteeing and, when necessary, rescuing financial institutions would fall to the finance ministers.
This would produce a unified and well-supported financial system within the euro zone. Even the UK, which is struggling with an oversized and undercapitalized banking system, might be tempted to join.
Euro-zone bonds could be used to assist the new EU states that have not yet joined the common currency area. They could also serve to increase the EU’s lending capacity beyond the current mandates of the European Investment Bank and the European Bank for Reconstruction and Development.
The EU could then finance investment programs that combine a countercyclical function with important European objectives, such as an electricity grid, a network of gas and oil pipelines, alternative energy investments and employment-creating public works in Ukraine.
All these investments would help break Russia’s stranglehold over Europe. The objection that they would take too long to serve a countercyclical purpose can be rejected on the grounds that the recession is also likely to last a long time.
Two thorny issues would need to be resolved: the allocation of the debt burden among member states, and the relative voting power of the different euro-zone finance ministers. Germany would consider the existing precedents — the EU’s budget and the composition of the European Central Bank — unfair and unacceptable.
Although many member states will balk at agreeing to a solution that changes the EU’s internal balance of power, some concessions would be necessary to bring Germany on board. Usually it takes a crisis to bring about a compromise, but the crisis is now brewing, and the sooner it is resolved, the better.
George Soros is chairman of Soros Fund Management.COPYRIGHT: PROJECT SYNDICATE
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