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European crisis

The Idea Merchants


Most people have heard of the Marshall Plan. Some even know what Brady bonds are. But they have not yet heard of the Brunnermeier Plan. Or Bishop Bonds. Or the Gros Accord. That is because they do not exist yet - except as dreamy proposals by economic thinkers to fix the European debt crisis.

While dealing with Europe's financial difficulties has been a grim slog for the continent's austerityweary citizens and its frustrated policy makers, it is the opportunity of a lifetime for ambitious idea merchants looking for fame.

If any of them can come up with a plan that is adopted by Europe, they will have secured a coveted place in history - like George C Marshall, the secretary of state who fashioned the plan to help rebuild Europe after World War II, and Nicholas F Brady, the Treasury secretary whose introduction of a class of investor-friendly bonds helped end the Latin American financial debacle in the early 1990s.

Three in particular who are respected in top policy circles and have access to the right people are Markus K Brunnermeier, Graham Bishop and Daniel Gros.

Each is proposing a grand plan to save the euro zone from financial ruin - and to do it in a way that may break through the political impasse that has made a solution so elusive. None of them, or anyone else, are assured of success, given the depth of Europe's problems and the difficulty of reaching consensus among the 17 EU countries using the euro.

The rival approaches vary. But all are meant essentially to help the two big euro zone countries on the financial precipice - Spain and Italy - find buyers for their debt at a reasonable enough cost that their governments can afford to recharge their economies over the long run. Success would mean developing a solution that persuades cash-rich Germany that it will not be on the hook if these countries run out of money. Armed with PowerPoint presentations and not a little guile, they have been promoting their competing ideas in meetings in Brussels, the centre of the EU; Frankfurt, home of the European Central Bank; and, in particular, Berlin, where the approval of German government officials is essential to the adoption of any plan.

"There is no shortage of ideas to solve the crisis, but there is a shortage of actionable plans, " said Brunnermeier, a finance professor from Germany at Princeton who represents Euro-nomics, a recently formed group of nine euro zone economists focused on the European crisis.

As he has shopped his plan, which calls for a type of Europe-backed bond that would not place an onerous claim on German coffers, Brunnermeier has traveled a similar circuit as the other two who are promoting their own blueprints: Gros, the head of an influential Brussels research group, and Bishop, a British specialist on EU financial and regulatory matters. The odds remain long that any of these proposals will be adopted in full. History-shifting ideas tend to come from within government - as was the case of the Marshall Plan or the Brady bonds - not outside it. But arriving at a plan that satisfies the euro-using countries, and Germany in particular, has stumped government officials.

Thus the opening for the well-connected policy entrepreneur. There is little time to lose given the fundraising needs of Europe's weaker nations. According to a report by Bridgewater, a large US hedge fund, Spain and Italy must issue 300 billion euros, or $368. 5 billion, worth of bonds this year and 1. 6 trillion euros, or nearly $2 trillion, by 2015. Cash-depleted banks there are now following the lead of foreign investors by reducing bond purchases, causing Spain's and Italy's borrowing costs to climb to dangerously high levels in recent weeks. Brunnermeier and Bishop are pushing variants of a common euro bond that would represent a pooling of some of Europe's national debts.

Gros supports turning the continent's new rescue fund, the European Stability Mechanism, into a licensed bank and using it to buy distressed Spanish and Italian bonds. He first floated the idea in a 2011 paper written with Thomas Mayer, Deutsche Bank's chief economist at the time. And it is now under scrutiny in European power corridors. "In a crisis, what matters is liquidity, " Gros said during an interview.

Last week, when Ewald Nowotny, an Austrian member of the governing council of the European Central Bank, was quoted as saying there were arguments in favour of such a plan, European bond markets rallied on the news. Gros, who is German but went to college in Italy and earned a doctorate in economics from the University of Chicago, is now director of the Centre for European Policy Studies. He argues that the euro zone's current rescue programmes are too small to cast fear into the hearts of speculators who are helping to drive up borrowing costs for the bloc's weakest members. Why not, he proposes, use the European Stability Mechanism's 500 billion euro cash cushion as leverage, to borrow up to five times as much from the European Central Bank?

The money could be used to buy distressed Italian and Spanish bonds in the open market. That, he says, would be easier and quicker than lending directly to those countries as part of a bailout. "You buy a Spanish bond at 75 cents to the dollar and you automatically reduce the country's debt, " he said.

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