LONDON (Reuters) - The euro zone is unlikely to survive its sovereign debt crisis in current form, according to a majority of leading economists and former policymakers polled by Reuters.
Fourteen out of 20 prominent academics, former policymakers and independent thinkers polled over the last 10 days agreed the euro zone’s make-up would change.
A new “core” euro zone with fewer members received qualified backing from 10 economists as a possible solution, with seven of them saying Greece should be excluded from it.
Six expected the currency bloc to survive as it is although Europe’s leaders have yet to settle on measures needed to solve the debt crisis, which is choking funding for Italy and Spain, the third and fourth largest euro zone economies which Europe can ill afford to bail out.
“The euro zone can and should survive, but will not survive on the current trajectory,” said Jeffrey Sachs, director of the Earth Institute at Columbia University in New York.
Other respondents included Martin Feldstein, Harvard professor and president emeritus of the U.S. National Bureau of Economic Research, leading monetary economist Takatoshi Ito, former Bank of England policymaker David Blanchflower and Mohamed El-Erian, chief investment officer at PIMCO.
There was a recurring theme that to tackle the crisis the European Central Bank should either become lender of last resort, or buy huge quantities of euro zone government bonds, in exchange for binding fiscal integration.
That will prove difficult, even though it looks increasingly likely the debt crisis has already tipped the euro zone back into recession.
Germany, the euro zone’s paymaster, and the ECB itself are staunchly opposed to the central bank becoming a lender of last resort, or monetizing debt through massive government bond purchases.
But pressure on them is growing. French Finance Minister Francois Baroin said on Wednesday the ECB should act as lender of last resort, citing the effectiveness of the U.S., British and Swiss central banks in this role.
Economists were clear that greater involvement from the ECB would have to come with fiscal strings attached.
The crisis took an unexpected turn on Wednesday thanks to one of Germany’s worst bond auctions since the launch of the euro, prompting concerns the debt crisis was even beginning to threaten Berlin — a previously unthinkable prospect which may change the approach of Europe’s largest economy.
There was a clear sense of frustration among contributors to the poll that the euro zone’s leaders have failed to push their vast resources into solving the crisis.
“At this stage, I believe they must show political will to go toward some fiscal integration,” said Francois Bourguigon, director of the Paris School of Economics and former chief economist at the World Bank.
He said this could start off with a euro zone authority that would be able to intervene if countries break basic fiscal rules.
“When this is done, it will be possible to issue euro bonds, and possibly to amend ECB rules ... for the ECB to monetize the debt.”
Bourguignon’s comments presaged the European Commission’s proposal on Wednesday to introduce new laws designed to make sure euro zone countries do not break rules, which could pave the way to joint debt issuance.
James K. Galbraith, professor of government at University of Texas at Austin, said the euro zone’s current leaders should stand aside and allow voters to elect new ones fit for the task of steering Europe out of the crisis.
“It needs leaders who know some real-world economics, understand national income accounts, have a practical view of central bank operations (and do not obstruct the necessary large-scale ECB bond purchases), are committed to the economic success of Europe and not merely to propping up their national banks,” he said.
While ten economists backed the notion of a smaller euro zone, they were clear that this was fraught with danger, and could arrive in several forms.
“Yes it could be (viable) in principle. But much would depend on who dropped out and under what circumstances,” said George Magnus, senior economic adviser to UBS Investment Bank.
Five rejected a smaller euro zone outright, mainly on the grounds that it would not work. At present, is not legally possible for a country to leave the euro zone.
While G20 leaders have spoken with increasing alarm about the implications of the euro zone’s debt crisis, the concluding message from the poll was the need for urgent and major action from Europe’s power brokers.
“Political leaders can now only show their determination to really work together — do the adjustments necessary in the periphery — and pray that the ECB will bail them out before it is too late,” said Daniel Gros, director of the Center for European Policy Studies in Brussels.
Octavio de Barros, Bradesco; Pierpaolo Benigno, LUISS Guido Carli; Mario Blejer, ex-president of the Central Bank of Argentina; David Blanchflower, Dartmouth College; Francois Bourguignon, Paris School of Economics; Bronwyn Curtis, HSBC Global Research; Fredrik Erixon, European Center for International Political Economy; Mohamed El-Erian, PIMCO; Martin Feldstein, Harvard University; Robert H. Frank, Cornell University; James K. Galbraith, University of Texas at Austin; Daniel Gros, Center for European Policy Studies; Takatoshi Ito, University of Tokyo; George Magnus, UBS Investment Bank; Yuri Okina, Japan Research Institute; Luca Paolazzi, Confindustria; Michael Pettis, Peking University; Lucrezia Reichlin, London Business School; Jeffrey Sachs, Columbia University; Mark Thoma, University of Oregon
Reporting by Andy Bruce; Polling led by Sumanta Dey in Bangalore; Editing by Ross Finley