SAK economists insist: Euro area slump can still be avoided

Economists at the Central Organisation of Finnish Trade Unions (SAK) are calling on European politicians to take vigorous measures to resolve the European debt crisis. Finland's largest national labour confederation believes that the banking crisis and worsening recession will threaten jobs and workers in Finland and throughout Europe unless a significant breakthrough is achieved.

The SAK economists present their views of the economic crisis in a new Finnish publication called Kuinka ulos eurokriisistä? (How to escape the euro crisis). The core message of this booklet is that we are facing a pan-European banking crisis that can no longer be managed merely by arranging new emergency credit facilities for Greece or other problem countries.

Solving Greek over-indebtedness will require debt restructuring. The economists feel that European stability instruments must also be strengthened to ensure that this restructuring does not turn a debt crisis into a full-blown banking crisis. The interim European Financial Stability Facility (EFSF) and the planned permanent European Stability Mechanism (ESM) must be credibly maintained to capitalise the banks, and the solvency of States must ultimately be guaranteed through these instruments.

"The stability instruments could be converted into banks operating under a credit policy of the European Central Bank. This would dispel fears of a full-blown banking crisis and ensure that States could meet their basic obligations under all circumstances," SAK Chief Economist Olli Koski explains.

The booklet suggests that merely national capitalisation of banks will not work in all cases. Capitalisation of large multinational banks will inevitably require European-level solutions. The economists insist that capitalisation should not be gratuitous, but that the stability instruments must take possession of the subsidised banks.

In addition to acute crisis management, a solution will be needed for the structural problems of the euro area. SAK nevertheless opposes any common financial policy at European Union level. The structural problems underlying the crisis &#;8211 such as a lack of competitiveness and contempt for EMU regulations in Southern Europe – will not be resolved through eurobonds or some other common fiscal policy. The economists feel that any such policy would be more likely to facilitate reckless housekeeping by countries that have managed their affairs badly.

"Instead of a common fiscal policy, we must ensure that the regulations of the euro area are respected. Any common understanding in this respect by the European Commission, the European Parliament and the Council of Ministers on reforming financial administration must be supported," Olli Koski insists.

Kuinka ulos eurokriisistä? (pdf, in Finnish only)