Blame Game, European-Style

The financial news from European Union keeps getting worse. Spain’s government, its banks foundering, may soon need to be bailed out. The cost of that rescue could strain the new European bailout fund, leaving little behind should investors turn on Italy next. Mario Draghi, the president of the European Central Bank, warned this week that the eurozone as currently structured had become “unsustainable”. He criticized Europe’s political leaders for half-measures and delays that have made the crisis worse. He is right. The problem is not a lack of ideas on how to fix Europe’s mess. France’s new president, François Hollande, is arguing that relentless austerity, championed by Germany, is not the answer and that indebted countries need help to grow. The European Commission issued a report saying that debt reduction had to be pursued in “a growth-friendly manner”. (Editorial – NYTimes – 31/05/2012)

Mr. Hollande, International Monetary Fund and many economists are also calling for jointly issued euro bonds to ease borrowing costs for indebted governments. Mr. Mario Draghi is pushing for long-term institutional reforms, including Europewide deposit insurance and bank supervision, a ceding of control unlikely to play well with powerful bankers and some leaders. What is lacking are politicians with the courage to tell their voters the basic hard truths, of how this crisis happened and what it will take to dig out. In Greece, the upcoming election has been framed as a choice between accepting externally imposed austerity or ditching the euro. Voters there need to hear that Greeks were, in fact, profligate borrowers and that austerity and painful reforms cannot be avoided, no matter what. If Greece reverts to drachma, pain would be far worse, provoking an even deeper recession and higher unemployment, as the new currency loses value and prices rise, and as companies and banks, unable to pay debts denominated in euros, are forced into bankruptcy court. But, either way, there will be plenty of pain. The challenge for Greece’s leaders, and all of Europe’s, is to find a way to encourage reforms and manage austerity without economic and social implosion. German leaders, meanwhile, are insisting that Greece and other indebted economies need to pay for their sinful ways. Chancellor Angela Merkel needs to level with her voters. Profligate lending by Europe’s banks, including Germany’s, helped drive up Greece’s unsustainable debts, as well as those in other economies. And the bailouts are not a favor to Greece and others. They are, in part, a rescue of Germany’s own banks, and German economy and financial system need them to work. That point was highlighted recently in The Times by Liz Alderman and Jack Ewing, who reported that two-thirds of $177 billion in bailout aid to Greece since 2010 has gone to pay off bondholders and lenders overseeing the bailout, including the European Commission, European Central Bank and the International Monetary Fund. Holding the eurozone together, and avoiding even wider chaos, will require sacrifice from all sides. Europe’s leaders can pull that off only if they tell their voters the truth about what is needed and about their own countries’ complicity in the crisis. 


Acerca de ignaciocovelo
Consultor Internacional

2 Responses to Blame Game, European-Style

  1. Professor Uziel Nogueira says: The European integration process is clearly a huge SUCCESS. The EUROZONE is in trouble but will be fixed by hook or by crook. Hypothesis of war has disappeared and the population is prosperous and educated. Young professionals can move freely and seek employment among its 27 member countries. The integration process is economically IRREVERSIBLE. The problem is politics. The euro, in circulation among 17 countries, is the main challenge of the integration process. The introduction of the common currency in January 2002 was done in a RUSH without proper economic conditions. Political considerations overrode economic fundamentals. A developing economy such as Greece had the same currency as the most advanced and efficient country in the world, Germany. A strong currency + low interest rates led to unsustainable public expenditures = huge debt crisis. The euro is UNSUSTAINABLE for many economies. The dynamic of the crisis will FORCE some countries to leave the euro. Voters will find out that keeping the euro demand unbearable sacrifices. The welfare state is over in the highly indebted countries. The financial crisis has already mutated into a political imbroglio.

    Like developing countries in the past, the financial system has taken over power from the political establishment in deciding the future of millions of Europeans.

    The social democracy is challenged by fringe (radical) parties of both right and left. Can it survive the test?

  2. (…..) Spain, though, is far from the only concern. Recent economic numbers have indicated that the situation is getting worse rather than better in Ireland and Portugal, two countries that have already been forced to take advantage of European bailout money. But it is the uncertainty in Greece that has been primarily responsible for fuelling Europe’s current doomsday mood. With general elections in the country approaching in mid-June, there is significant concern that, should the anti-austerity leftist party Syriza win, it could lead to Europe turning off the money faucet, leading to Greece’s departure from the euro zone. And that would have unpredictable consequences for the rest of the currency union — and the global economy as a whole. On Friday, two polls gave conflicting views of voter preferences ahead of the vote, with one finding the pro-bailout conservatives from New Democracy slightly ahead and another revealing a preference for Syriza. Many investors, it would appear this week, have decided not to wait around to find out. The euro has lost nearly 7 percent of its value against the dollar in May and hit a two-year low on Thursday. On Friday, as European stock markets continue their downward trend, the euro is once again losing ground.


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