‘Desperate diseases call for desperate remedies,’ as the proverb proclaims. And the failure to administer them is precisely the explanation for the plight of the euro. The euro crisis simply will not go away. The euro itself is reacting like a yoyo, rising and falling, its value fluctuating unpredictably. Meanwhile, the tensions in the euro area are assuming unprecedented proportions. The disparities between Germany and most of the Southern European member states (Greece, Italy, Portugal, Spain) are becoming an increasingly yawning gulf. This is despite the more than €400 billion that the member states, the European Central Bank (ECB) and the International Monetary Fund (IMF) have injected into the countries and banks at risk in the form of loans, buying-up programmes and all manner of guarantees.

It is not difficult to identify the reason for this instability. From the inception of the Greek crisis, the response of most European leaders was one of vacillation. Rather than adopting a series of Draconian measures to deal with Greece from the outset, in conjunction with an unshakable determination to come to the country’s assistance and not allow it to go bankrupt, they blew hot and cold. Doubts were even openly expressed as to whether there was still any point in keeping Greece on board. Ultimately it took a full six months before work began on a first instrument, the European Financial Stability Facility (EFSF), to provide practical assistance to those countries in the euro area which were at risk.

The European Central Bank has now ceased to help euro countries which are struggling. In the absence of effective and well-considered action by the member states, the ECB has been compelled to buy massive quantities of government bonds from the countries most at risk. The ECB’s portfolio now includes more than €76 billion in the form of mostly Greek, Irish and Portuguese government bonds, which are worth a little less each day due to the falling ratings. The ECB is rightly no longer willing to be lumbered with the role of compensating for the lack of action by our dithering European political leaders.

Little progress can be anticipated in future, either. The decision by heads of government to make the Stability Pact more stringent, which is necessary in order to prevent any recurrence of the Greek situation, is seen by both the financial markets and the principal policy makers at the European Central Bank as ‘too little, too late’. And the so-called ‘Euro Plus Pact’, which was concluded on 25 March 2011 and which was supposed to have supplemented monetary union with effective economic governance for the euro area, is entirely devoid of credibility. Just like the unsuccessful Lisbon Strategy, it sets out a series of fine-sounding intentions and ambitious objectives without indicating how the member states are to be compelled to take the measures and implement the reforms which are needed in order to attain the objectives. Lastly, there is the permanent crisis mechanism, the European Stability Mechanism (ESM), which is to be created by means of a treaty amendment. This new instrument, which is to replace the EFSF, has likewise made little impression on the financial markets. Just like the EFSF, it will be a purely intergovernmental instrument based on unanimity, so that if even a single euro country opposes the proposed action, that will be sufficient to torpedo any rescue operation.

In brief, the approach adopted by our hesitant government leaders is far too soft, far too limited and modest to convince the markets that the euro crisis is under control, let alone that it has been overcome. In order to be genuinely convincing, a radically different package is required: a comprehensive, coherent strategy, an all-embracing approach which goes to the root of the matter. In my view it must be based on seven pillars.

Firstly, devising a structural solution for Greece. It is time for us to stop beating around the bush. The Greek problem must be solved, as quickly as possible. Until it is, Greece will continue to have a damaging impact on the euro area. Other countries with far less serious problems are being infected by the Greek virus. Expelling Greece from the euro area would not offer any solution. It would only weaken the area, or even cause it to collapse. Thus there is no other option but to make a joint effort to extract Greece from the mire. That will require an effort from everybody: from Greece itself, which will have to introduce more onerous and radical reforms and measures, and from the other euro area countries too, which will have to substantially reduce the rate of interest payable, ideally to the level which the IMF charges Greece, and lastly from all holders of Greek government bonds, who will also have to make a contribution by accepting that either the period of validity of the bonds should be extended or they should be converted into a smaller package of eurobonds, but then with a far better rating.

Secondly, it is necessary genuinely to tighten up the Stability Pact, so that situations like that of Greece can genuinely no longer arise. The package now on the table, which is essentially still based on the deal reached by Sarkozy and Merkel, on 19 October 2010, in the fashionable French spa of Deauville, does not go nearly far enough. The inescapable problem is that it is the member states themselves that are expected to exercise supervision and impose penalties. And nobody trusts them to do so, particularly not the financial markets. At all events, such an approach has never worked in the past and no one sees why it should suddenly do so now. Just as for the purpose of enforcing competition rules, it should be an independent institution – to be precise, the European Commission – that enforces the convergence rules laid down in the Stability Pact. Penalties should become automatic. And they should also apply to macroeconomic imbalances or to countries which falsify their statistics as Greece did. For the European Parliament, which possesses shared legislative powers in this field, a genuine tightening-up of the Stability Pact is in any case an absolute precondition for giving its consent.

Thirdly, in addition to the monetary pillar, urgent measures need to be taken to establish the economic pillar in the euro area. As indicated above, the ‘Euro Plus Pact’ is by no means adequate to this task. The economic governance which we need in the euro area must go far beyond merely coordinating the economic policies of the various member states in the area. As I have stated in a previous forum together with former Commission Presidents Jacques Delors and Romano Prodi, a Community act for economic governance and convergence is required, a common policy of economic convergence which involves the member states being compelled to implement all manner of measures: reforms of the labour market, wage formation, the tax system, the pension system, industrial policy and scientific research. These must ensure that the economy – or at least the economic performance – of all countries in the euro area develops in the same direction and at the same speed. To reiterate, peer review, best practices, benchmarking, the instruments which were already applied in the unsuccessful Lisbon Strategy, are inadequate. Mandatory convergence rules are needed which indicate what minimum efforts and/or reforms are required of all members of the euro area. If necessary, it should be possible for compliance with the mandatory convergence rules to be enforced by means of penalties on the member states which are in difficulties.

Fourthly, we must turn the ESM into a genuine EMF, an institution which is managed at Community level, so that it cannot be blocked by any reluctant member. This European Monetary Fund should be responsible for monitoring the financial stability of the euro area, devising reform programmes for countries in difficulties, financing these programmes and monitoring their correct implementation. It is clear by now that the existing unanimity system is dangerous, because the refusal of a single country can endanger the stability of the entire euro area. The EMF and the Eurogroup should therefore take decisions by a qualified majority.

Fifthly, the European banks must be put in order. The examples of Japan and Sweden, which have experienced similar banking crises, are clear. Sweden immediately carried out thorough stress tests on its banks and recapitalised them where necessary. The problem was solved quickly and the Swedish economy soon recovered. Japan waited for twelve years before dealing with its problem, which meant twelve years of stagnation. The so-called stress tests which were carried out in Europe were a joke, as witness the fact that the bank which brought Ireland to the brink of disaster did not even undergo a stress test. Until such time as serious efforts are made to put Europe’s banks in order, credit provision will remain at a meagre level and our economy will not revive to any meaningful extent.

Sixthly, a policy of investment and growth is also needed, particularly in those countries in the euro area which are facing serious financial difficulties. We must not repeat the error which was committed in the 1930s. Harsh spending cuts are needed in order to put those countries’ public finances in order. Healthy public finances are the best guarantee of growth and prosperity in the longer term. But we must ensure that, in the short term, we do not enter a negative economic spiral which will only aggravate the problem of public finances in those countries by increasingly reducing already declining revenue. Hence the need, in addition to a rigorous austerity policy, to take a number of measures to stimulate the economy – more precisely investment in research, infrastructure, energy and the internet. As the countries concerned are not themselves in a financial position to do this, the European Union will have to take the strain. That presupposes a far-reaching reallocation of the EU’s budget funds, but above all requires a genuine European bond market to be established which would be far more capable than at present of attracting capital and savings from the new growth countries.

The establishment of such a liquid European bond market, which would attract savings from inside and outside Europe, is the keystone of the overall strategy which is needed to overcome the euro crisis. Essentially, the ‘eurobond market’ would be a forum for the trading of two kinds of bonds. ‘ Project bonds’ would be issued specifically to finance long-term investment in, for example, road infrastructure, energy networks, the internet and research projects. ‘Eurobonds’meanwhile are bonds designed to bring about a general restoration of the European economy. Thanks to the European Union’s general AAA rating and thanks to greater liquidity, the interest which would have to be paid on the bonds would be less than on the bonds of any European country. Part of the revenue would serve to put the banks on a sounder footing, more precisely to fund the necessary recapitalisations. On the other hand, eurobonds should be used to tackle the debt problem. Part of the debt of the member states can be covered by issuing eurobonds. Those who perform well and reduce their debt can take full advantage of the lower interest rate on eurobonds. Those who do not, and who retain persistently high debt burdens, would not be allowed to participate in the eurobond system to the same extent. In that way, eurobonds would become an instrument to compel countries to display greater discipline and implement more reforms without endangering the stability of the euro area itself.

In the past year and a half, the European Union has displayed many doubts, much disunity and sometimes not much solidarity or responsibility. As a result, the very existence of the euro is at stake. It is therefore high time for us to abandon half-hearted solutions.

(*) Guy Verhofstadt is chair of the Alliance of Liberals and Democrats for Europe (ALDE) group in the European Parliament

Expelling Greece from the euro area would not offer any solution