ANY EURO zone country which fails to ratify Europe’s new fiscal treaty could be driven out of the single currency due to soaring borrowing costs, former EU commissioner Peter Sutherland said.
In a reference to the breakdown of talks on a private sector contribution to the second Greek bailout, he warned that Europe may face the risk of an uncontrolled sovereign default in the near future and was not equipped to deal with the fall-out.
“The continuing fear must remain that an unplanned unco-ordinated default by a member state may occur and may occur in the near future and there may still be inadequate mechanisms in place at that moment to avoid contagion to others,” he said.
To confront that danger, it was inevitable that EU leaders would have to further empower their bailout funds of the European Central Bank to “potentially overwhelm” the challenges arising from such an event.
Mr Sutherland, chairman of Goldman Sachs International, was speaking in Brussels at a debate to mark his departure as president of the European Policy Centre think tank. In a debate with competition commissioner Joaquín Almunia, he said it was clear that a separate treaty establishing the European Stability Mechanism permanent bailout fund will exclude non-signatories of the fiscal treaty from receiving aid from that fund.
“That may be salutary in the context of national debate. It should be noted that in the event of a member state not signing the treaty, not being prepared to proceed with it, might well have the effect of driving any such party out of the euro itself because of the soaring costs that borrowing thereafter would necessarily imply.” Europe was faced with an “existential” crisis in the real sense of that word, he said.
“Those who console themselves with the fact that calamitous results will follow and therefore it won’t happen are perhaps living in a fool’s paradise. The same might have been said about Sarajevo in 1914. Accidents happen. Political events occur. They are provoked by situations and political failures. But no matter how dire the consequences may be they are always a risk and they’re particularly a risk at this time.”
Mr Sutherland said EU leaders should make a political declaration in support of the role of the ECB. “There is a fear of articulating what the ECB can and should do even though it is already doing much of the role of a lender of last resort.” He also said the credit risk of fiscally weaker states must be dealt with by at least partial mutualisation of that risk.
Furthermore, he said the debt crisis has brought home to the peoples of Europe how important the decisions made in Brussels are even though people feel remote from them.
“They have not felt connected to its decisions, they have not felt connected to its disciplines, they have not felt connected to Brussels and the effect of this has been not merely an alienation but a remoteness of Europe from the everyday concerns and economic policies of the member states as it appears.
“This is particularly true as a result of the fact that governments do their best to obscure the relevance, particularly the positive relevance of Europe to the solution of problems.”
