Principles and Economic Style Moulded Into Sustainability and Foreign Policy Interests
“The concept of the Social Market Economy links the principle of freedom on the market and the instrument of competitive economics with the principle of solidarity and with mechanisms of social compensation. This link is not a mere smart decision of a purely institutional wisdom, but it lays on a decision on values which is borne by the moral foundations of our European culture”. This is the statement of the Commission of the Bishops’ Conferences of the European Community. Most politicians and even academics who see themselves as Catholics normally take seriously most doctrinal declarations of this church’s leadership. Thus, it is expected that such declarations are to be found to a larger or smaller extent in drafted legislation and in created institutions. From such statements, the Social Market Economy develops advantages and shortcomings. Its advantages are related to its purpose of organising economic and social life at a national level in such a way that a competitive and creative balance of power between the economic agents, government and individuals as actors is achieved. Another advantage is its attempt at inclusiveness which is done via the corporatist approach in social and professional relations. Convincing individuals to join professional groups and defend their common interest is an inclusive and integrative approach. Nevertheless, corporatism can also be a shortcoming of the Social Market Economy because it induces a danger. If professional groups defend their interests in common, they have quite a big chance to dominate not only some of the members of parliament via their professional affiliation but even minister and thus parts of government. Particular interests are served here, even though they are not individual interests but small group interests. This happens at the expense of the general interest when such corporatist groups from within the Social Market Economy delay and sometimes block necessary economic reforms. Following the economic and financial crisis in 2007–2009, the national economic and social system in place in Germany and Austria had become known enough in order for the term “social market economy” to be adopted in art. 3 (3) of the EU Treaty of Lisbon. Thus, this system managed to pass from a national terminology in economic policy, which at times was even taken for a mere political label given in Germany, to a legally consecrated term enshrined in the EU Treaty texts.
A European mechanism for sovereign debt crisis resolution: a proposal. Bruegel Blueprint Series, 9 November 2010
This Bruegel Blueprint argues that Europe should take the lead in defining a solution to the problem of excessive public debts and create a European Crisis Resolution Mechanism (ECRM).The authors, Francois Gianviti, Anne O. Krueger, Jean Pisani-Ferry, Andre Sapir and Jurgen von Hagen, present the rationale for such a mechanism in the euro area and details of how an ECRM would work. The ECRM would be a permanent tool to deal with sovereign debt crises in an effective and predictable way.
Alternative Approaches to Sovereign Debt Restructuring
Serious gaps exist in the means available to deal with sovereign debt crises. In recent cases of sovereign default, both the debtor country and its creditors have paid large costs, in terms of lost economic activity and income and lost value of claims. Some people see these costs as necessary to discipline debtors to avoid default. Bankruptcy should be messy, they say. In the view of many, however, the costs incurred under the current international financial architecture are unnecessarily large, to the detriment of both the debtor and its creditors. Some in the private sector also point to the fact that they have been able to conclude agreements with countries that have accumulated unsustainable debt and have defaulted. They point to Ecuador as completed, and express confidence that Argentina can be dealt with when the Argentine authorities finally approach them for serious negotiations. But this is not good enough. The losses to the Ecuadoran and Argentine economies from the processes available in those two cases have been huge and, arguably, unnecessary. Thus, doing nothing should not be considered an option. What then are the relevant alternatives for dealing with sovereign debt crises? There are essentially three: 1. A statutory approach to establish a universal legal framework to facilitate negotiations and to empower a supermajority of creditors to approve a debt restructuring agreement with a debtor country that would bind in minority dissenting creditors. This is the sovereign debt restructuring mechanism (SDRM) proposal of Anne Krueger, the first deputy managing director of the IMF. Although based on statute, this approach relies on decisions by creditors and is, in that sense, a market-oriented approach. 2. A broadening of the kind of collective action clauses (CACs) that are already included in some (mostly British law) sovereign bond issues and their incorporation into a wider array of debt instruments, possibly to include bank loans. These new and innovative contingency clauses would, inter alia, describe as precisely as possible the procedures by which holders of a specific debt instrument would interact with the sovereign debtor and among themselves in the case of a request by the sovereign for a restructuring of those claims. These proposals were first made by John Taylor, under secretary for international affairs at the U.S. Treasury. 3. A two-step process proposed by Ed Bartholomew and Ernie Stern of J. P. Morgan. In step one, creditors would effectively exchange outstanding debt for claims that include collective action clauses, which could then be used, in step two, to facilitate a restructuring agreement between a sovereign debtor and those creditors. What is needed is a system that produces a promise of orderly resolution of unsustainable debt situations that can be activated in a timely manner and that can proceed with reasonable assurance of finding agreement without undue delay--that is, a process that has a reasonably predictable end game. Limiting the kind of disruption and dislocation to the economy that has been seen in too many recent cases can help preserve substantial value both for the creditors and for the country and its citizens, including the poor who often suffer the most as a result of the economic fallout from financial crises. There are major issues posed in the search for a workable system to produce this desired result. How does one know when a country's debt is unsustainable and warrants an appeal to a bankruptcy mechanism? How can the incumbent government, and the relevant ministers and officials, be persuaded to accept that reality and approach creditors for relief? Who gets to decide or to vote on a final agreement? How is such an agreement to be made binding on potential holdout creditors? Where should a mechanism for dispute resolution reside? What is the role for the official community, and the IMF in particular, in all of this? …