We’re losing count of how many European Union summit meetings have ended with “historic” agreements to contain the euro-zone debt crisis only to see them fall apart as markets judged they were inadequate or irrelevant to the problem of making good on old debts and generating enough growth to pay off future obligations.
Andrew Rosenthal, the editorial page editor, offers commentary and quick takes on breaking news stories.
We are not optimistic that Friday morning’s agreement on a “new fiscal compact” for the euro-zone will now break that cycle.
The agreement — all 17 members that use the euro have agreed to sign it — is built around Germany’s demand for legal commitments to maintain fiscal and financial discipline. In the long-term, more discipline and coordination and more financial transparency are good things. But a pact that binds all members to more austerity in a time of recession is exactly what Europe does not need right now. The agreement will also increase the money available for future bailouts. But the amounts are still far too small to persuade investors that Europe is prepared to back up much larger economies like Italy and Spain. And it still leaves the euro zone without a lender of last resort, like America’s Federal Reserve, to defend vulnerable countries and banks from market panic.
The pact will prove worth the effort only if it persuades the European Central Bank to assume that role. Statements earlier this week by the bank’s president, Mario Draghi, are not encouraging.
Germany wanted all 27 European Union members to join the fiscal pact. But Britain, Europe’s third-largest economy after Germany and France and ever ambivalent about the union, refused to go along. Britain has stayed with the pound, so its refusal will not make much practical difference on fiscal policy. But it could isolate Britain and weaken the European Union as a whole.
Europe has learned the hard way that sustainable monetary union requires better coordination of national fiscal policies. Greece wrecked its finances by overspending, undertaxing and falsely reporting its budget numbers. But major leaders, especially Chancellor Angela Merkel of Germany, still refuse to acknowledge that coordination isn’t enough.
Without crisis-management mechanisms like fiscal transfers from richer to poorer members and a central bank willing to be a lender of last resort, financial crises can leap borders and doom the whole euro zone to recession.
Other euro-zone members currently under market attack, like Italy and Spain, have manageable deficits. Austerity will only make their problems worse. They suffer mainly from high borrowing costs, weakened banks and faltering growth. Their immediate problem is the high interest rates produced by Europe’s mismanagement of the Greek crisis. If the European Central Bank bought enough bonds to drive their interest costs to precrisis levels, their deficits would quickly start to evaporate.
If Germany were willing to do its own part by buying more from its weaker neighbors — and stopped insisting that austerity is a one-size-fits-all-conditions answer — all of Europe, as well as the United States, would have better chances of restoring robust growth. That would really be a “historic” solution to the euro-zone crisis.
Read Full Article »