BERLIN
A mechanism is required to permit overly indebted countries to exit from the euro system, a panel of German economic experts said in a report on Tuesday -- although one panel member on Wednesday took issue with the report.
In a report submitted to the German government on Tuesday, the German Council of Economic Experts, an independent body, proposed that the means for an orderly exit from the single currency should be created for countries whose high levels of debt make it impossible for them to fulfill the conditions imposed on euro system members.
But, on Wednesday, panel member Peter Bofinger came out against the proposal, warning that providing an exit from the euro would create moral hazard, in which overly indebted countries would be assured of a debt restructuring, in an interview with wall street online.
The report said that the eurozone should avoid the kind of confrontation that was recently seen between Greece and the other eurozone members.
"A continuous lack of cooperation by a member can pose an existential threat to the monetary union. Therefore the exit of a member from the monetary union should be possible as a last resort," the report said.
The experts backed the German government’s insistence on observing strict fiscal rules in negotiating with overly indebted countries, and also urged the creation of long-term reform measures to strengthen the architecture of the Eurozone.
The advisors proposed creating an "insolvency mechanism" to make it possible for a member to exit from the monetary union, and suggested that the member should work directly with financial markets in restructuring debt, and not with political partners.
"From the point of view experts, such an insolvency mechanism can be a significant instrument of crisis prevention. Similar to the recent agreements on the role of creditors in the case of a failed bank, share of losses among creditors should also be the case in national bankruptcy," the report said.
Professor Christoph Schmidt, director of the German Council of Economic Experts, warned that continuing financing of overly indebted countries would not be feasible amid growing public discontent.
"For the cohesion of the monetary union we have to recognize that the electorate in the creditor countries is not prepared for continued financing of the indebted countries," Schmidt said.
But Bofinger maintained that, for the sake of sustaining the euro, such financing must be envisioned. "Any other approach would lead to a systemic crisis," he said.
Germany’s Finance Minister Wolfgang Schauble had advocated the idea of a "temporary exit" for Greece early this month, during negotiations in Brussels among the European partners on a third bailout.
European leaders and Greek government agreed on a conditional bailout deal on July 13, after more than 17 hours of negotiations in Brussels, with the hope of preventing the EU member state from going bankrupt.
German Chancellor Angela Merkel, however, distanced herself from the idea of a temporary 'Grexit'.
Merkel told German lawmakers on June 17, during an extraordinary meeting of the Parliament on Greece, that a 'Grexit' would not be an option, as long as it is not requested by Athens.
"This can only be possible with the agreement of Greece and 18 other members of the eurozone. Neither Greece, nor the other 18 members signaled readiness for that. So that option was not conceivable," she said.
Greece is negotiating with international creditors this week on a list of policies that must be legislated over the next three years in exchange for a lifeline of as much as 86 billion euros ($95 billion).
