Financial and debt crises have gone hand in hand in the eurozone. Everything started with the massive credit boom in southern European countries and in Ireland.

The current crisis was caused by "banks lending money too carelessly and having too little equity capital," said Clemens Fuest, an economics professor and government advisor who believes a fundamental reform of the financial system is necessary.

Southern competitiveness

The first steps have already been taken. One of them is Basel III, a reform package compiled by the Basel committee of the Bank for International Settlements that requires banks to have a higher equity capital. However, for Fuest, a professor at Oxford University, the measure doesn't go far enough. "There is still a ways to go to reaching a decision that government bonds need to be backed by equity capital in the future," he told Deutsche Welle.

Until now, government bonds have been viewed as a risk-free investment. To purchase them, banks were not – and still aren't – required to guarantee adequate collateral, leading to ballooning sovereign debt.

Economic experts argue that debt-ridden countries in the eurozone will need to export more and achieve a surplus in their balance of trade to pay off their loans. In a nutshell, they need to become more competitive.

Trade surpluses are an issue

Jürgen Trittin, parliamentary co-leader of the opposition Green Party, sees opportunities in building trans-European electricity and natural gas grids. "There is huge potential for southern European countries to capitalize on their resources in the area of renewable energy," he said.

European deficit countries also need to lower their prosperity expectations to become competitive again. These countries don't operate in a vacuum, however. Their deficits didn't happen without surpluses elsewhere. Huge trade imbalances have helped steer the eurozone into its current predicament.

Since Germany has racked up some of the bloc's biggest trade surpluses in recent years, Berlin must also take action to change this, according to Trittin. "Germany must do something about its flagrantly weak domestic demand, introducing a minimum wage," he told Deutsche Welle.

If Germany preaches that wages shouldn't rise more than productivity, then, conversely, the country must accept that "wages shouldn't constantly trail behind productivity," Trittin added.

From a monetary union to a fiscal union

In the future, the European Commission aims to keep an eye on the economic balance in the eurozone. For Trittin, this is a step in the right direction. "We can hardly imagine a monetary union that isn't at the same time a fiscal union," he said. Moving ahead, he added, Germany cannot accept guarantees for those countries that have run into problems because of their poor tax and regulatory policies.

Ireland is an example of one such country that attracted investors with low corporate taxes, according to Trittin. A harmonization of tax policy, he believes, would be an important step toward a fiscal union and a European finance ministry.

Economist Fuest, however, can't imagine such a ministry as long member states cannot be kept from plunging into debt. "We have no (federal) finance ministry that can tell German states how much debt they can have," he said. Put another way, if Germany, the role model in the eurozone, hasn't done so at a federal level, then such a move is hardly conceivable at a European level.

Debt mechanism for everyone?

A European fiscal union may not be necessary if Germany could export its stability and all member states established a debt brake mechanism in their constitutions.

But Fuest doesn't have high hopes of this ever happening. A debt mechanism, he argued, would achieve little if it is not supported by politicians and their constituents:

"If southern Europeans believe a German debt mechanism is being imposed on them, they'll find ways and means to get around it."

Author: Zhang Danhong / jrb
Editor: Sam Edmonds