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Euro Zone Reform

e21 | October 26, 2011

e21 has been heavily covering the fiscal crisis in Europe with our own commentaries and with our weekly Global eBrief. The bulk of the discussion is analyzing exactly how dire the situation is.

e21 contributor David Malpass, President of Encima Global LLC, had a rare ray of sunshine for Europe in today’s Wall Street Journal. He outlined reforms to help Europe attract foreign capital and reduce bad debt.

The bar for re-establishing confidence in Europe is probably not as high as it seems. A bold plan to cut government spending and sell government assets would work. Investors are looking for a home for trillions in idle Federal Reserve-generated dollars, and Italy's 10-year bond has a yield of 6% compared to only 2.2% for the U.S. 10-year Treasury.

A key to Europe’s problems is in converting its lavish pension system into something more like the US’s defined-contribution system.

When economies and the work force were growing, politicians and government unions promised workers they would pay their pensions and health-care costs without limit. They counted on a pyramid of new workers and, at many U.S. pension funds, rosy assumptions about strong investment earnings and short life spans for retirees. They borrowed trillions, helped by low interest rates, faulty bond ratings, fake accounting and, in Europe, a political conspiracy to ignore the 3% European treaty limit on deficits.

Thus an epic battle is underway in Europe and the U.S. over the size of government amid shrinking resources. The euro zone's path forward is clear but politically difficult. As nations, they need to cut government spending, sell assets and allow private-sector competitiveness. As part of a union, the euro zone has to divide up the losses from past deficits, restore confidence in sovereign bonds, and create a system that won't let politicians borrow as much as they did.

Read the whole thing.

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