Opinion
Deal leaves govts out of ammunition
By Matthew Lynn (China Daily)
Updated: 2010-05-12 13:34
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Big problem, big number. The leaders of the eurozone countries have thrown 750 billion euros ($963 billion) at shoring up confidence in the single currency. But it doesn't matter how many zeros you put on the end of a bad idea. It's still a bad idea.
In reality, you can't stabilize a sinking ship.
The new stability package suffers from the same problem as all the other ones the European Union has come up with in the months since the Greek crisis started rattling the markets last year: It tries to fix the symptoms, not the causes.
Greece has exposed deep structural problems within the euro. There is no mechanism to stop governments breaking the rules. There is no popular support for massive fiscal transfers between countries.
The rules for the euro area have turned out to be unreliable. And there is no way to start stimulating economic growth again in the heavily indebted nations.
Those are the hard questions. Even 750 billion euros won't get close to answering any of them.
The markets have greeted the latest package with a wave of euphoria.
No great surprise there. Everyone likes a bailout, and particularly the financial markets. There is so much sovereign debt on the books of European banks that the possibility of default, or just sharp losses on those portfolios, was prompting fears of a meltdown in the financial system. It could have been Credit Crunch Round Two. There was bound to be relief at avoiding that.
The stock prices on European bourses soared. The euro strengthened the most in 18 months against the yen on foreign- exchange markets. Finance ministers will have been relieved at the reaction. They were looking to reassure the markets, and to punish speculators, and on that measure they succeeded.
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First, where are the incentives for governments to stick to rules? The crisis arose because the euro area didn't enforce the Stability and Growth Pact, which limited budget deficits to 3 percent of gross domestic product in all but exceptional circumstances.
If the pact had been rigorously enforced, Greece would never have been allowed into the euro. Once in, it would have been disciplined for allowing its deficits to balloon even when the economy was booming.
If it got bailed out for behaving badly, why should any other government behave itself? The bailout package talks about tougher disciplinary measures, but what are they? Are tanks going to be sent into Dublin if Ireland doesn't stick to its austerity program? Will the Portuguese get kicked out of the euro if they don't control their deficit? Of course not.
The only credible deterrent was letting Greece default. By wimping out of that, the EU has no ammunition left.
Second, there is no popular support for the massive fiscal transfers between countries that are now proposed. Take a look at the hammering that German Chancellor Angela Merkel's coalition took in regional elections this weekend. Where is the 750 billion euros supposed to come from?
Elected politicians are going to pay a terrible price at the ballot box for offering to foot any of the bill. Don't be surprised if they start sliding on their commitments once they look at their poll ratings.
Third, the rules of the euro area turned out to be about as solid as a slice of brie left out in the midday sun. We were told there wouldn't be any bailouts between member states. We were told the European Central Bank wouldn't buy government bonds in the market. We were told the stability pact would be enforced. None of those promises turned out to be true.
If the rules of the euro can be rewritten on a Sunday night in Brussels once, they can be rewritten next time there is a crisis. Investors will remember that.
And they won't believe what they are told about how the euro operates from now on.
Finally, it doesn't address the issue of how you get the heavily indebted countries growing again.
The problem in Greece, Portugal, Spain, Ireland, Italy, and potentially France as well, isn't just that governments are going to have to push through huge and painful austerity programs.
It is that they can't devalue their currencies at the same time to provide some relief to their economies, and to provide some hope of future growth.
You can't run an economy with just sticks. You need some carrots as well. The EU not only has to fix the debt problem, it has to provide the money to stimulate growth as well.
But, for all the reasons explained above, that isn't going to happen. The money isn't available.
"We will do whatever it takes" to defend the euro, European Commission President Jose Barroso said last week. The euro area threw everything it could at the crisis this weekend.
The immediate battle may have been won. The markets will rally and the panic will abate. Yet investors will pick away at the real issues in the next few weeks until we are back where we started. And next time around, there won't be anything left to throw at the problem.
Matthew Lynn is a Bloomberg News columnist. The opinions expressed are his own.
