Reports of end to the euro zone crisis are premature
However, the monetary authority has stated it will engage in the purchase of a country’s debt securities only after that country has formally asked for help via the European support mechanisms, the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM).
That, in turn, is certain to result in the imposition of a stringent fiscal austerity programme upon the recipient country.
The politically intolerable measures a bailout would impose means democratically elected governments are certain to request support only if the financial markets force them to do so.
That assures continued uncertainty and volatility.
More importantly, the ECB’s latest policy manoeuvre should be viewed in its proper context: as a measure designed to create time for governments in the periphery to implement durable solutions that restore stability.
However, monetary policy is no remedy for the structural problems that have laid the peripheral countries low.
The sheer size of the imbalances allowed to build up in the period following the launch of the single currency means it will be several years before any commentator can declare confidently that an end to the crisis is in sight.
Successful resolution of the crisis requires much more than the reduction of fiscal deficits and public debt ratios to sustainable levels.
It must also involve a sufficient deleveraging of overstretched private-sector balance sheets in several member countries, as well as ample investment in the productive capital stock – not only to spur much-needed job creation to bring down unacceptably high unemployment rates but also to boost exports and eliminate structural external deficits in the absence of a fiscal transfer union.
The attainment of these goals is simply not feasible in the short run. A planned reduction in the fiscal deficit at any given level of output – in tandem with a desired increase in private-sector savings relative to investment – must be accompanied by an equal and opposite adjustment in the financial position of the external sector.
In other words, exports must increase by a sufficient amount vis-a-vis imports to offset weakness in government consumption, household consumption and private investment simply to maintain a constant level of output.
Basic arithmetic indicates that rapid adjustment and hence a quick resolution of the euro crisis is not possible in the absence of currency devaluation and robust external demand. This means that high levels of economic, financial and political uncertainty are virtually certain to persist for several years.
Those who believe the monetary union’s travails are close to an end are dreaming.