Two-tier euro is best option, says ex-BoI boss
CENTRAL Bank board member and former Bank of Ireland CEO Mike Soden believes that the creation of a two-tier euro could give the EU the time it needs to resolve the problems now threatening the survival of the single currency.
Speaking to the Sunday Independent in a personal capacity, Mr Soden outlined his strategy, saying: "Fundamentally, the six original states -- Germany, France, Holland, Austria, Belgium and Luxembourg -- would take a step up and create a 'super euro', leaving the other EU member states with the old euro, albeit a devalued one. As the debt in the periphery states was raised in the old euro, this is the currency the debt would continue to be denominated in and repaid in."
The former Bank of Ireland chief said the creation of a two-tier euro would serve the political wish to continue with the EU's ambitions while allowing its member states the flexibility they required individually to deal with their respective deficits.
Commenting on this, he said: "The difficulties of this proposal might be far more palatable to the electorate in all countries than the more rigid solution facing us today: reducing our budget deficits through draconian measures while limiting the borrowing of the indebted countries to more moderate levels.
"It is worth noting that, whatever political costs might be incurred, the economic and social costs would be less severe this way."
Recognising that the creation of a two-tier euro could be viewed by the markets as yet another "deferral strategy", he said the EU could alternatively consider adopting measures similar to those employed by Germany in 2008 to clear its banks of €500bn of toxic debt.
On this, he said: "An alternative to such drastic measures would be an enforced debt-to-GDP ratio on each member state with effect from, say, January 2013. In the case of Ireland, it may be assessed we could manage our economy with a 60 per cent debt-to-GDP ratio. What the troika might determine is that it will ringfence the total amount in excess of 55 per cent debt to GDP for Ireland, thus giving it some breathing space for room and growth.
"The amount ringfenced could be marked to market and put with an investment vehicle, which would be held to maturity, say 20 years -- much the same process Germany initiated in November 2008 to clear its banks of €500bn of toxic debt. These assets can be funded by a long-term facility, funded by the troika or some variation of this group."
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Mr Soden said the same process could be repeated for each member state across the EU with the creation of a debt-to-GDP ratio that would be enshrined in all fiscal treaties.
He cautioned, however, that the burden on the richer nations could be deemed excessive by their own electorates, and in turn deemed to be too big a price for the creation of united Europe and a strong euro. But he said the restoration of confidence and financial stability had to be considered the "ultimate goal".
"Unless the fundamental dysfunctional economic measures are changed, it will be a long time before financial stability and confidence is restored," Mr Soden added.