By Patrick Artus

The governments of eurozone countries and institutions have been very innovative in their attempts to pull out of today’s crisis ― creation of the European Financial Stability Facility (EFSF) - European Stability Mechanism (ESM); the possibility for this fund to buy government bonds and recapitalise banks; the ECB’s long-term (three-year) repos; direct purchases of government bonds; and massive creation of liquidity by the ECB.

The purpose of these policies is to prevent bank failures, drive down long-term interest rates on government bonds and to try to jump-start credit. They have been implemented quite quickly, and we should welcome the fact that the eurozone countries have succeeded in making progress towards solidarity and federalism, which was not initially evident: common funding by the EFSF-ESM and common recapitalisation of the ECB in the event of losses on the portfolios of assets it has bought.

In addition, they have managed to implement unconventional monetary policies and to decide on supervision of banks at a eurozone level, which pompously is called a “banking union.”

Unfortunately, this "willingness" of the European countries, which has led them to make concessions on their "normal" theory ― German acceptance of ECB bond purchases or the ESM shoring up banks directly ― has been far from enough to pull the eurozone out of the crisis. The interest rates paid by Spain and Italy are still very high and are choking off the two countries’ economies; credit is not picking up and more and more countries like Spain, Italy, Greece, Portugal are falling into a depressive spiral where the high interest rates, private sector deleveraging, restrictive fiscal policies and distortion of income sharing to the detriment of employees are leading to a collapse in domestic demand and an inability to reduce fiscal deficits.

As a result, investors are increasingly sceptical about the troubled countries and interest rates remain abnormally high, which is destroying any possibility to jump-start these economies.

So a feeling of helplessness is emerging among the governments and the leaders of the European institutions: despite the restrictive fiscal policies, the structural reforms (e.g. labour market policies in Spain and Italy) and the progress towards solidarity, federalism and banking union, the confidence of the "financial markets" has not been restored and investors are still not buying bonds issued by the troubled countries except for a few days from time to time. What can be done to calm the markets once and for all?

The problem is that restoring investor confidence in these countries to the point where they are willing to buy government bonds again will require policies that are not attainable in the short term, as they would require changes in institutions and public opinion that are unthinkable today, and which either will never take place or will take place only in the very long term.

The first change is joint financing by eurozone countries, or eurobonds, i.e. the complete pooling of public debts, which would prevent a situation where investors can choose to finance a few countries and not others and which would make it possible to take advantage of the quite solid financial situation of the eurozone as a whole.

But eurobonds cannot be introduced without a loss of sovereignty for national parliaments in the budgetary domain, something that is currently rejected in almost all countries. However, it is impossible to jointly finance fiscal deficits chosen freely by each country without any constraint.

The second required change is a shift from a solidarity limited to reactions to financial crises, as we have seen above, to a solidarity aimed at restoring the real economies. The depressive spiral into which Spain, Italy, Greece and Portugal have slid cannot be interrupted by these countries on their own, as they have no fiscal leeway. It would require a European policy to support job creation and companies establishing operations in these countries, for example with reductions in labour costs including reduction in welfare contributions paid by companies, financed by all countries.

This would be real federalism, with some countries paying an additional tax to ensure that economic policies aimed at boosting employment and investment are conducted in other countries. But this federalism of the real economy is also rejected by most countries, which do not want to create a "transfer union".

The helplessness among European leaders is due to the fact that none of the measures they have decided on has a lasting positive effect on the eurozone crisis. To permanently solve the crisis, two institutional "leaps" would be needed, but which are currently unacceptable for the majority of public opinion: the pooling of public debt and federalism in the form of sharing the cost of policies implemented to stimulate employment and investment.