European credit markets have appeared calm in recent weeks, but none of the underlying issues of the debt crisis have been adequately addressed. Spanish interest rates have again begun creeping up, and a new wave of anxiety could burst forth any time.
Yet European finance ministers were busy congratulating themselves last weekend for creating a robust “firewall” to keep the debt crisis from spreading, deter speculative attacks in the bond markets and keep interest rates manageable. Like so much else done by the European Union in the past two years since the start of the Greek debt crisis, the ministers’ newly announced plan was too little, too late. No one should be fooled.
The ministers proclaimed a bailout fund of 800 billion euros, or about $1 trillion, but, in fact, it was far less than that. The agreement keeps the 300 billion euros in the current bailout fund temporarily available while a new fund of 500 billion euros is built up over the next two years. The old money will phase out as the new money phases in, so it is misleading to add the totals together. The amount actually available for new bailouts may never get much above 500 billion euros. That might be enough to keep doling out life support to Greece, Portugal, Ireland and, now, possibly Spain. But it is not nearly enough to fend off speculators, hold down interest rates or aid the pro-growth policies needed for economic recovery.
Experts from around the world had called for a firewall of at least 1 trillion euros, or $1.34 trillion. Germany rebuffed that idea, and other ministers, as usual, followed its lead. One of Germany’s main arguments for limiting its contributions is to maintain pressure on Greece, Ireland, Spain, Italy and others to keep them from pulling back on their austerity programs, which have, so far, only deepened their debt problems. Yet European leaders now expect the International Monetary Fund to help by lending some of its own resources to the new bailout fund. Before it adds any money, the fund should demand more contributions from the European Union itself, with Germany leading the way, since the policies pushed by Germany have hurt many I.M.F. member nations through reduced exports to Europe.
Even the highest firewall created by a big bailout fund can just buy time to address the euro zone’s underlying problems, including overregulated markets, costly trade barriers and archaic educational systems. Fixing those requires an immediate policy turn from debt-deepening austerity to substantial public investment. Unemployment rates are rising steadily across Europe. The official euro-zone average now stands at 10.8 percent. A prolonged recession driven by austerity will not help governments repay old debts. We are still waiting for Europe’s political and financial leaders to recognize that reality.
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