Time to take the medicine and bring back euro from death's door

Thu, May 31, 2012, 01:00

ANALYSIS:We are in a real pickle, and the best that can be hoped for is a protracted but steady grind back to stability and growth, writes DAN O'BRIEN, Economics Editor

IF THE fragility of the entire euro zone edifice generated remarkably little comment and contextualisation by bickering politicians during the referendum debate, the EU’s bureaucracy in Brussels provided plenty of food for thought yesterday on the scale of the reform challenge facing national governments across the continent.

Its 24 reports on all of the bloc’s non-bailed-out countries made for some depressing reading, as Greece comes to resemble more closely a failed state with each passing day and the banking systems of Spain and Cyprus teeter.

The very detailed assessments, accompanied by policy recommendations for every government, are part of the new and much more comprehensive system of peer review agreed last year (these changes are, incidentally, an infinitely bigger integrative leap than the relatively minor changes contained in the treaty the Irish electorate is voting on today).

Will the new system and yesterday’s specific recommendations to individual governments cure Europe’s ills?

“No” is the answer in the short term. Europe’s problems are so great that even if every policy recommendation under the sun were to be implemented tomorrow, the healing would only just have begun. We are in a real pickle, and the best that can be hoped for is a protracted but steady grind back to stability and growth.

In the longer term, however, the scope of these analyses and policy prescriptions offers hope that another mess of the kind we are in now can be avoided in the future.

Drawing an analogy with one’s personal health, Europe’s old rules were akin to a medical check-up that involved merely having your temperature taken, your pulse checked and a stethoscope pushed to your chest for 20 seconds before you were sent on your way.

Just as such a cursory once-over could not be expected to reveal much about your wellbeing, the old euro rules failed to show up some very serious underlying problems in the European economy. The price for that is being paid now as some economies are in intensive care and the euro is at death’s door.

The new “six pack” of tests is akin to an entire morning at a clinic being prodded and poked and obliged to produce bodily samples of every kind. Having as many tests as possible increases the chances that an ailment will be detected before it causes problems or, worse still, becomes life-threatening. And so it is, hopefully, with Europe’s new rules.

But rules are one thing. Politics another. At a risk of overextending the metaphor, some patients are more willing than others, and not all have much respect for the medic prescribing the often unpalatable medicine. Even now, and despite having signed up to the new rules, national capitals still instinctively bridle when the European Commission tells them what is good for them. If they don’t accept that this is the price of making a currency union work, then the death of the euro is as inevitable as your demise and mine.