Atlantic Council

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On June 4, the Atlantic Council hosted a discussion on Europe’s fiscal future with Dr. Josef Ackermann, the immediate former CEO of Deutsche Bank who recently assumed the chairmanship of Zurich Insurance Group. In addition to leading Germany’s largest bank for a decade, Ackermann helped negotiate Greece’s debt write-down with private creditors as chairman of the Institute of International Finance. 

In recent weeks the eurozone crisis has dramatically escalated following the inconclusive elections in Greece, the deterioration of Spain’s banking sector, and the inability of Germany and the rest of Europe to contain the crisis and define the way forward. Ackermann touched on all of these pressing issues in a broad-ranging discussion with Atlantic Council president and CEO Frederick Kempe.

Europe’s leaders must not let the euro fail – the future of Greece and the rest of Europe depend on a successful eurozone.

A Greek exit from the eurozone would be devastating to the country and Europe as a whole. Estimates price the immediate cost of a Greek exit at around €500 billion, but resulting financial contagion and economic uncertainty would cause further losses across the continent and across the globe. Any gains Greece might see from a massively devalued drachma would be offset by crushing inflation rates, as investors fled the country.

Europe understands the ultimate costs of a Greek exit far surpass the costs of saving the common currency. For this reason, Ackermann argued, no serious political party in Europe is coming out strongly against the euro or further European integration. For example, in Germany, a strong deutschemark surrounded by weaker national currencies would hurt the country’s export-driven economy. Ackermann underscored his faith in German Chancellor Merkel and her electorate, explaining that when push comes to shove, “I have no doubt that the people of Germany will support whatever is needed for [the future of] Europe.”

A divided Europe will lose its ability to determine its own future.

If the eurozone is going to survive, member states should transfer many financial oversight competencies directly to the European-level. Centralized bank supervision, eurozone-wide deposit insurance, and a true fiscal union are all necessary ingredients for the long-term viability of the common currency. It is equally important for European leaders to effectively explain the benefits of a united Europe. Current popular backlash against the European project is undermining decades of economic integration and political progress, and Ackermann emphasized that Europeans need a new vision that they can rally behind. It is paramount that Europeans understand that their future lies with an integrated Europe, and that their leaders give them compelling reasons to further integrate. “A fragmented Europe has no way for self-determination. We will have to accept what the United States, China, India, Brazil, and other countries [dictate to] us. This cannot be the future of our children. Only a united Europe can negotiate with all these countries at a high level,” said Ackermann.

Ackermann argued that Merkel should allow struggling banks to access bailout funds directly. Numerous systemically important financial institutions, especially in Spain, are in desperate need of recapitalization. Giving banks immediate, direct access to these funds would go a long way in calming both investors’ fears and political tensions across the continent. It is also vitally important for Europe to quickly complete the European Stability Mechanism, which would increase the EU’s firewall to a total of €1 trillion.

While painful, the crisis has given Europe the chance to finally get it right.

The eurozone’s original design and initial success ultimately led to an uncompetitive periphery and complacency, rather than towards further fiscal integration. The sovereign debt crisis has changed all of this, as markets are now demanding that Europe solve its structural problems. Greece has made significant progress in reforming its economy. Prime Ministers Rajoy and Monti are reforming Spain and Italy’s uncompetitive labor markets. And the eurozone as a whole has embarked on much deeper fiscal integration. Steps like the Fiscal Pact would have been unheard of even six months ago.

The many challenges facing Europe’s leaders are daunting, but Ackermann claimed the crisis has given Europe a chance to revisit the common currency’s architecture, making it sustainable for a more integrated and self-determined Europe. “If we manage it successfully, it may be the first time that Europe jointly solves a problem and can talk about it with some pride.”

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MEDIA MENTIONS

• Deutsche Bank's Ackermann on Europe, Bailouts, and a 'New Vision' - American Banker
• Ackermann Says Euro Bonds Aren’t Answer For Euro Crisis - Meera Louis, Bloomberg
• German will rescue euro zone: Ackermann - Greg Robb, MarketWatch
• Gambling on Success in Europe - Joseph J. Schatz, CQ