(Updates with summit outcomes in third paragraph.)
Dec. 9 (Bloomberg) -- Nobel Economics Laureate Christopher A. Sims said Europe needs to preserve the euro and that the only obstacle to a functioning currency union is better fiscal coordination.
“It’s worth paying a price to preserve the euro,” Sims, who is in Stockholm to attend an award ceremony for the Nobel economics prize he won in October together with Thomas J. Sargent, said yesterday in an interview. “It needs to be a true fiscal union. That means there should be some kind of euro-wide tax instrument. There should be euro bonds.”
European leaders convened in Brussels last night in their latest attempt to stem the spread of the debt crisis, which now threatens the AAA credit ratings of the bloc’s biggest economies. The talks yielded a show of commitment to tighter anti-deficit rules and the addition of 200 billion euros ($267 billion) to the region’s crisis-fighting funds. German Chancellor Angela Merkel said Europe will create a “new fiscal union” that includes a “debt brake for all euro countries.”
“Some people talk as if the cultures and the economies are so different that it was a mistake to think of trying to unify them,” Sims said. “The mistake was only in thinking that it was feasible to have a monetary union without any discussion of preparing institutions for a central fiscal authority. If you could put those two things together, I think there would be big advantages to Europe.”
There are more advantages than disadvantages to keeping the euro, Sims said. “There should be an active market in euro bonds backed up by a central euro tax. As soon as you put in a euro tax, you’ve implicitly put in fiscal transfers.”
Germany has said that any debate on common euro-area debt issuance could only come after tighter fiscal union has been achieved. Focusing on common borrowing before imposing better budget controls across the 17-member union risks taking focus away from the bloc’s main goal, German Finance Minister Wolfgang Schaeuble said Nov. 28.
Sims said the European Central Bank’s decision yesterday to cut its benchmark interest rate a quarter percentage point to 1 percent was needed to support the economy.
“The euro area looks like it could be going into recession because of all these uncertainties and in that case it makes sense for the ECB to be trying to offset that,” he said.
The ECB is calling on the politicians to do more to stem the crisis. ECB President Mario Draghi said yesterday that “all euro-area governments urgently need to do their utmost” to deliver fiscal sustainability. The ECB has resisted calls to act as a lender of last resort, arguing such a step would compromise its inflation mandate.
“If there is fiscal backing for it, it would be a good idea for the ECB to act as a true lender of last resort to identify those countries that are paying high interest rates, mainly because of panicky behavior on the part of people who are afraid of default,” Sims said.
Draghi yesterday offered banks unlimited cash for three years while damping speculation the ECB will buy more government bonds to stem the region’s debt crisis.
The yield difference between Italian two-year notes and similar-maturity German bunds grew to 594 basis points, the widest spread this week. The 10-year spread swelled to 444 basis points from 389 on Dec. 7.
If the ECB were to “intervene and people have the idea that this was just going to be used by the southern European countries as an excuse not to get their public house in order and that there is no commitment on the part of the northern European countries to back up the ECB if it needs recapitalization, the result would be inflation and that in itself would endanger the euro,” Sims said.
--Editors: Tasneem Brogger, James Hertling.
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