London - The eurozone is unlikely to survive its sovereign debt crisis in its current form, according to a majority of leading economists and former policymakers polled by Reuters.
Fourteen out of 20 prominent academics, former policymakers and independent thinkers polled over the last 10 days agreed the eurozone’s makeup would change.
A new “core” eurozone with fewer members received qualified backing from 10 economists as a possible solution, with seven of them saying Greece should be excluded from it.
Six expected the currency bloc to survive as it is although Europe’s leaders have yet to settle on measures needed to solve the debt crisis, which is choking funding for Italy and Spain, the third- and fourth-largest eurozone economies which Europe can ill afford to bail out.
“The eurozone can and should survive, but will not survive on the current trajectory,” said Jeffrey Sachs, director of the Earth Institute at Columbia University in New York.
Other respondents included Martin Feldstein, Harvard professor and president emeritus of the US National Bureau of Economic Research, leading monetary economist Takatoshi Ito, former Bank of England policymaker David Blanchflower and Mohamed El-Erian, chief investment officer at PIMCO.
There was a recurring theme that to tackle the crisis the European Central Bank (ECB) should either become lender of last resort or buy huge quantities of eurozone government bonds, in exchange for binding fiscal integration.
That will prove difficult, even though it looks increasingly likely the debt crisis has already tipped the eurozone back into recession.
Germany, the eurozone’s paymaster, and the ECB itself are staunchly opposed to the central bank becoming a lender of last resort, or monetising debt through massive government bond purchases.
But pressure on them is growing. French Finance Minister Francois Baroin said on Wednesday the ECB should act as lender of last resort, citing the effectiveness of the US, British and Swiss central banks in this role.
Economists were clear that greater involvement from the ECB would have to come with fiscal strings attached.
The crisis took an unexpected turn on Wednesday thanks to one of Germany’s worst bond auctions since the launch of the euro, prompting concerns the debt crisis was even beginning to threaten Berlin - a previously unthinkable prospect which may change the approach of Europe’s largest economy.
There was a clear sense of frustration among contributors to the poll that the eurozone’s leaders have failed to push their vast resources into solving the crisis.
“At this stage, I believe they must show political will to go towards some fiscal integration,” said Francois Bourguigon, director of the Paris School of Economics and former chief economist at the World Bank.
He said this could start off with a eurozone authority that would be able to intervene if countries break basic fiscal rules.
“When this is done, it will be possible to issue euro bonds, and possibly to amend ECB rules... for the ECB to monetise the debt.”
Bourguignon’s comments presaged the European Commission’s proposal on Wednesday to introduce new laws designed to make sure eurozone countries do not break rules, which could pave the way to joint debt issuance.
James K Galbraith, professor of government at University of Texas at Austin, said the eurozone’s current leaders should stand aside and allow voters to elect new ones fit for the task of steering Europe out of the crisis.
“It needs leaders who know some real world economics, understand national income accounts, have a practical view of central bank operations (and do not obstruct the necessary large-scale ECB bond purchases), are committed to the economic success of Europe and not merely to propping up their national banks,” he said. The zone's twilight?
While 10 economists backed the notion of a smaller eurozone, they were clear that this was fraught with danger and could arrive in several forms.
“Yes, it could be (viable) in principle. But much would depend on who dropped out and under what circumstances,” said George Magnus, senior economic adviser to UBS Investment Bank.
Five rejected a smaller eurozone outright, mainly on the grounds that it would not work. At present, is not legally possible for a country to leave the eurozone.
While G20 leaders have spoken with increasing alarm about the implications of the eurozone’s debt crisis, the concluding message from the poll was the need for urgent and major action from Europe’s power brokers.
“Political leaders can now only show their determination to really work together - do the adjustments necessary in the periphery - and pray that the ECB will bail them out before it is too late,” said Daniel Gros, director of the Centre for European Policy Studies in Brussels.
Participants in the survey were:
Octavio de Barros, Bradesco; Pierpaolo Benigno, LUISS Guido Carli; Mario Blejer, ex-president of the Central Bank of Argentina; David Blanchflower, Dartmouth College; Francois Bourguignon, Paris School of Economics; Bronwyn Curtis, HSBC Global Research; Fredrik Erixon, European Centre for International Political Economy; Mohamed El-Erian, PIMCO; Martin Feldstein, Harvard University; Robert H. Frank, Cornell University; James K. Galbraith, University of Texas at Austin; Daniel Gros, Centre for European Policy Studies; Takatoshi Ito, University of Tokyo; George Magnus, UBS Investment Bank; Yuri Okina, Japan Research Institute; Luca Paolazzi, Confindustria; Michael Pettis, Peking University; Lucrezia Reichlin, London Business School; Jeffrey Sachs, Columbia University; Mark Thoma, University of Oregon.