THE EURO’s incomplete design, as revealed by the international financial crisis, is being filled out by increments under intense political and market pressure. It is not an elegant process, driving to a foreseen conclusion, but one proceeding by reactive, exploratory decisions which address particular problems.
Sunday night’s decision by the European Central Bank to purchase Italian and Spanish bonds helped stem market worries about the liquidity of their debt markets, but it has opened up further questions about the scale of the funds required and the ultimate responsibility for providing them. These await further political decisions. Global concerns about debt sustainability in the United States as well as the EU, and fears about another recession, make them even more necessary and urgent.
Even though the emergency summit of euro zone leaders in Brussels on July 21st agreed to refinance Greek debt and protect Italy and Spain from market contagion, it did not increase the funds available, and relied on due parliamentary process in each member state to implement its decisions. In the meantime, only the European Central Bank could act in response to continuing market pressure. But, typically, it lacked a mandate to intervene and had to assemble one over the weekend in an emergency meeting. That seems to have worked yesterday, but who knows whether it will be sufficient to bridge the gap between the July decisions and their proper implementation? The existing special funds and mechanisms are clearly inadequate to finance Italy and Spain and would need to be roughly quadrupled to do so. Such a scale of change requires major political decisions on how such a collective responsibility would be handled and democratically overseen.
Major European decisions like this have classically been taken in crisis conditions, when the alternative to deeper interdependence looked like fragmentation or disintegration. This is no bad thing if events force clarity about the available options. That must involve political leaderships primarily; so far during this long crisis prevarication and half-measures have been more typical than decisive action. It is equally important to understand how leaders act under democratic mandates. They must secure public acceptance for deeper economic and political co-operation.
The time has surely come for such an approach towards the euro’s inadequate design and functioning after the holiday season this autumn. Now that Italy and Spain have become so central, the question of joint responsibility for public indebtedness and economic performance can no longer be handled reactively and incrementally. These two states have demonstrated a determination to tackle structural and competitiveness problems in return for euro zone solidarity. That will become much more common practice if the system is deepened through some variant of the eurobond scheme to create common indebtedness and mutual guarantees. Taking such a historic step will also require a willingness to act together on stimulating growth and employment at European level.