Euro zone needs own bonds and tax: Nobel economist

STOCKHOLM (Reuters) - An economist who will receive the Nobel prize on Saturday told Reuters the euro zone needs its own jointly issued bonds, a central fiscal authority and its own tax if it is to survive.

Nobel Prize for Economics winner Professor Christopher Sims of Princeton University speaks during a news conference at Princeton University in Princeton, New Jersey, October 10, 2011. REUTERS/Tim Shaffer

Nobel Economics prize winner Christopher Sims said such changes would also help persuade the European Central Bank to become a lender of last resort for euro zone countries in trouble -- a role the ECB has so far resisted.

“I think some kind of (joint) euro bond and some kind of European-wide fiscal authority will have to be part of any solution that is really stable,” Sims told Reuters late on Monday, dismissing the idea that simply tightening budget discipline would suffice.

“A euro bond that was clearly backed by some kind of euro-wide fiscal authority would have the same kinds of advantages that U.S. treasury bills do now,” added Sims, who will share the 2011 Nobel prize for economics with Thomas Sargent.

A threat by ratings agency Standard & Poor’s to downgrade 15 countries in the bloc - including dominant economies Germany and France - has ramped up pressure for radical moves to finally contain the crisis that has spread from one euro sovereign debtor to another over the past two years.

“Fiscal integration needs to involve more than just budget discipline, more than just the centre telling countries they have to shape up and raise taxes or cut expenditures,” Sims said, lending his support to views that financial market economists have been pressing.

“... you have to create the other side of fiscal integration which is some way for the centre to cushion countries that are in temporary difficulties,” he added.

This would include “creating a euro-wide tax that could back euro bonds.” He conceded Germany was resistant to such ideas, but remained a “marginal optimist” that European leaders would act decisively once they realized the euro was under threat.

Otherwise, euro zone states would think more deeply about what they had lost in giving up their own currencies - having a lender of last resort and the chance to use inflation to help solve fiscal problems.

“Those reforms don’t necessarily have to come right away. What has to come right away is recognition that things are moving in that direction, that there is good will and understanding of the need to compromise,” he said.

“If that doesn’t begin to emerge, then I think countries will want to start to leave. Once two countries have done it, I think the whole system becomes unstable.”

Sims, of Princeton University, and Sargent, of New York University, won the Nobel prize for work that governments can use to gauge the effects of policy. Their work was lauded by the prize committee as laying the foundation for modern macroeconomic analysis.

Reporting by Anna Ringstrom; Editing by Ruth Pitchford