By Judit Kozenkow
Washington, DC – June 20, 2012
After the Greek elections markets seemed to calm down but it lasted only for a couple of hours. Again. If we take a look at the crisis management of the euro zone in the last two years it is clearly seen that short-term measures and ‘hopes for further steps’ as lately the pro-euro views of the winner New Democracy party in Greece are not the solution for the survival of the euro. The typical muddling-through policies of the European Union should be skipped. It’s high time to do something serious before Spain and/or Italy need real help!
Take a few examples of the euro crisis management. At the EU level measures have aimed mainly at stabilizing the financial and banking sector and restoring confidence in Europe. In 2010 the European Financial Stability Facility (EFSF) of €750 billion was created. In 2011 euro zone leaders agreed on a 50 per cent write-off of the Greek sovereign debt held by banks, an increase of the fund of the EFSF, and a mandatory level of 9 per cent for bank capitalization in the EU. Recent steps include the creation of the Fiscal Compact, an intergovernmental treaty with a balanced budget rule, and the European Stability Mechanism, the permanent rescue fund.
The troika, composed of the EU, ECB and IMF, has provided bail-out packages for troubled countries, namely Ireland, Portugal, Greece (twice) and lately Spain. Countries, such as Ireland, Italy, Greece, Portugal, Spain and others have implemented austerity measures at the national level in order to avoid external help or fulfill the strict requirements of a bail-out.
What we can conclude from all the above mentioned steps is that each one on its own has provided only a short-term solution for the increased borrowing costs and lost credibility of the particular country, the euro zone or Europe itself. From time to time these measures have calmed the markets but it’s been two years now and the euro zone is still suffering from either recession or stagnation and the fear of potential contagion among the peripheral euro members.
Portugal can be described as a good example of the combination of a bail-out and well implemented austerity measures and structural reforms. However, its problems have not been solved completely as it integrated deeply into the European Union so it depends mostly on the progress of Europe.
So what could be the right direction toward sustainable growth and public finances? Paul Krugman suggested recently in NYTimes that “the origins of this disaster lie farther north, in Brussels, Frankfurt and Berlin, where officials created a deeply – perhaps fatally – flawed monetary system.” I cannot agree with him. I believe that the missing foundations of a fiscal union are only part of the problem. The study of the individual countries shows long-term, imbedded national mismanagement of public finances and fiscal laxity. These country-specific characteristics won’t disappear in a fiscal union and we can’t live the dream again as we did at the beginning of the European Union that the integration is able to solve all the problems of the joining countries.
As causes of the sovereign debt crisis and thereby major problems vary country by country it is essential to combine the steps at the European and national level. While concentrating on building long-term sustainable growth models, national structural reforms and comprehensive measures, including steps toward the creation of the missing pillars of a fiscal and monetary union at the EU or euro area level are necessary to successfully overcome the crisis.