An appeal to French President Emmanuel Macron and German Chancellor Angela Merkel to remedy the “significant fragility” that continues to mark the Eurozone at this stage of unquestionable recovery appeared on September 29 on the French newspaper Le Monde and again on Germany’s Frankfurter Allgemeine Zeitung, signed by some of the most authoritative French and German economists, including Jean Pisani-Ferry (Hertie School in Berlin and Sciences Po in Paris), Lars Feld (University of Freiburg, German Council of Economic Experts), Philippe Martin (Sciences Po, French Council of Economic Analysis) Marcel Fratzscher (Berlin’s DIW Center and Humboldt University), just to name a few. According to these thinkers, the current economic growth in the Old Continent (a) is too dependent on the European Central Bank’s monetary policy, (b) continues to be characterized by a strong accumulation of public debt, (c) is entrusted to common European authorities that only have blunt tools when it comes to advance common policies. An additional political problem, this time of a political kind, is that Paris and Berlin’s leadership continue to have different visions on various reform possibilities: the common budget of the Euro-area, the development of the ESM (the European stability mechanism) and EFM (European Monetary Fund), more generally on the European instruments for stabilization and risk sharing.

What to do, then? For the petitioners it is about expediting the integration of the capital market, also through the instrument of a European deposit insurance scheme for bank deposits in the euro area (a missing link in the project regarding the European Bank Union), but first of all drawing important lines on the various national commercial banks’ exposure to the sovereign debt of their respective countries. Only then can Germany accept a growing sharing of risks, given that the ban on Member States regarding bail-outs and the bail-in requirement for banks become more credible only if the vicious cycle between sovereign debt and credit gets broken. At the same time, France will have to accept an enhanced market discipline on its public finances with a new obligation to finance excessive new deficits through bonds which would be restructured if the country loses market access.

These are without question, some radical proposals, to which now a reply has come – once again published on Faz – by some of the most influential economists of the LUISS School of European Political Economy (SEP): Carlo Bastasin, Pierpaolo Benigno, Marcello Messori, Stefano Micossi, Franco Passacantando, Fabrizio Saccomanni and Gianni Toniolo. These thinkers – in their open letter that you can read here in Italian and here in all other available languages – agree that “a reflection by economists on the future of the Euro-area” is “welcome and overdue (…). However, any workable solution presupposes the identification of some appropriate combination of risk reduction and risk sharing measures apt to reassure investors in financial markets against the re-emergence of asymmetric shocks hitting more fragile countries and by doing so endangering the integrity of the monetary union”.

Regarding the debt restructuring mechanism, these Italian economists reflect, we should remember the mistakes that the French-German leadership already made on this matter at the now famous Deauville Summit of 2010: “What the French and German economists fail to see is that by raising fears that sovereign debts might not be honored, the introduction of ex-ante automatic mechanisms for sovereign debt restructuring would make it more difficult for markets to distinguish liquidity from insolvency risk. Rather than improving market discipline, such mechanisms would again open the door to the possibility of an investor run, leading to a self-fulfilling financial crisis. As Latins used to say, errare humanum est, perseverare diabolicum“. To err is human, but to persist is of the Devil.

The second proposal by the French-German economists – the introduction of different risk weights on sovereign bonds issued by Euro-area members in the calculation of banks’ capital requirements – is defined as “counterproductive”. It is no coincidence that “it has already been rejected by all countries outside the Euro-area within the Financial Stability Board”, is the view of the SEP professors. “Rather than making banks safer and preventing contagion, this proposal may, in fact, exacerbate financial fragmentation. The reason is that in the absence of an ultimate Euro-area fiscal backstop against massive liquidity runs and of a safe asset of common reference for the management of banks’ liquidity, banks’ borrowing costs will inevitably be linked to the sovereign bonds of their respective countries. A risk weight on national sovereigns held by the banks may aggravate fragmentation by reinforcing the perverse link between government debt and banks’ balance sheets, depriving banks of the instrument needed to manage their liquidity”.