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Symposium 2013

Solution for Holistic Approaches to Solve the Euro Crisis

The Challenge

Fourteen years after its foundation, the European Monetary Union (EMU) is facing the greatest challenge of its history thus far. High unemployment in a number of member countries, the need for substan ...

Fourteen years after its foundation, the European Monetary Union (EMU) is facing the greatest challenge of its history thus far. High unemployment in a number of member countries, the need for substantial consolidation of the budgets of numerous governments, and distressed banks are symptoms of economic misalignments and economic policy failure that threaten not only economic prosperity in Europe, but the European project as a whole. A series of interrelated fiscal and financial crises in the euro area have provoked a series of extraordinary policy measures. Some of these measures have undermined the fiscal sovereignty of affected countries, and they have circumvented market mechanisms. As social cohesion is called into question in various debtor countries, there is a danger that policy makers cannot or will not solve the existing problems in a way consistent with both monetary stability and the current political integration. The ECB’s announcement to possibly step in via its OMT-program has somewhat calmed down financial markets since mid-2012, but most of the fundamental questions for the future of Europe are either unanswered or answered quite differently by various parties. Policy makers have bought time, but the question remains what this time is used for and where the current policy stance leads to.

Bank resolution in Europe should involve systematic bail-ins via contingent conversion of debt to equity

To prevent bank insolvencies from destabilizing the financial system, a European Bank Resolution Agency (EBRA) should be established. The EBRA would resolve distressed banks in an orderly way and recapitalize them if appropriate. Remaining ESM funds should be exclusively used for this purpose, and lenders would participate in the losses incurred by failing banks to the utmost extent. To strengthen the future loss absorption capacity of banks, all new debt-based financing of banks should be subject to a conversion clause that stipulates that bank debt is automatically converted into equity if the equity ratio falls below a certain threshold.

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