NCPA - National Center for Policy Analysis

Medicine for What Ails Europe

July 24, 2015

Though the Greek crisis has been placed on pause, the economic situation in Europe remains bleak. Eurozone growth is up slightly from its near-recession levels, but projections by the International Monetary Fund for 2015 and 2016 barely exceed 1 percent. Unemployment remains above 11 percent — twice that among the youth. The core challenge is fiscal; Europe cannot escape the need to scale back its sclerotic welfare states.

By recognizing that, and implementing the following series of mutually reinforcing policies, the continent can move beyond its current torpor, says Michael Boskin of the Hoover Institute.

  • Gradual fiscal consolidation -- reducing the projected future size of government spending, and hence future tax      rates -- will be at the center of the effort.
  • The mutualization of some portion of the liabilities of highly indebted countries -- defined as a debt-to-GDP ratio above, say, 60 or 70 percent -- and modest write-downs in exchange for long-term zero-coupon bonds.
  • Europe's zombie banks will have to be resolved by acquisition or temporary takeover, cleanup, and asset sale, as was done by the Resolution Trust Corporation during the US savings and loan crisis in the 1980s.
  • Structural reforms that increase labor-market flexibility and reduce red tape and related obstacles to new business formation must also be implemented.
  • The Eurozone should adopt a two-track euro with a fluctuating exchange rate. Systematic rules would have to be developed to determine when members of the eurozone are demoted to "euro B" or promoted to "euro A." Such a halfway house would avoid at least some of the problems of a country's complete withdrawal from the eurozone. 

Together, these policies would reduce sovereign debt, lower interest rates, ameliorate tax pressures, enable countries to increase competitiveness with fewer sacrifices to living standards and provide Europe with a road map to prosperity.

Source: Michael J. Boskin, "Medicine For What Ails Europe," Hoover Institute, June 19, 2015.


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