Dealing with the euro crisis

 

A GOOD night’s work was done by euro zone leaders at their summit to strengthen the single currency. Their decision to offer a 50 per cent write-down of the debt owed by Greece to international banks confronts that problem head on after months of denial and prevarication.

Agreement on a €106 billion recapitalisation of banks exposed to the debt is another recognition of hard financial realities. And their readiness to multiply the existing €450 billion European Financial Stability Facility with insurance and international credit also indicates a firm intent.

There is huge uncertainty about the euro’s future arising from the accumulated failure to tackle debt sustainability, banking stability and capital adequacy in a comprehensive way. It has been a failure of political will and commitment more than of decision-making structures. For the world’s second most powerful economic region it has involved two major political questions: who should bear the cost of these widely canvassed solutions and is that in the fundamental interests of those most concerned? Until those questions were answered little progress was made towards finding proper means to rescue the euro.

The euro was designed as a fair-weather currency riding on the liberalising and globalising international economy dominated by a policy assumption that markets would correct themselves, superseding the classical business cycle of booms and busts. These assumptions were proved cruelly mistaken by the global financial crisis from 2008. It has taken three years to agree what must be done to rebuild the original design.

Germany now accepts it would be much more costly to abandon than save the euro and sees it must bear most of the cost of doing so as its strongest and most beneficial member. Orderly defaults and a proper capital base for the currency must be found. These three agreements therefore represent a historic recognition of Germany’s role and responsibility within the euro zone and a more general willingness to find ways to reconstruct the currency’s governing. This is not to say it will succeed. The long delays have deepened uncertainty and hastened global shifts of economic influence away from Europe towards Asia. Although the funds involved are huge they are probably not enough. Mutual guarantees and pooling of state bond issues within the euro zone would be preferable to the insurance and credit schemes now being pursued. Far too little has been done to encourage economic growth out of austerity.

Above all it has yet to be shown that a real politics can be created to make this an accountable democratic system of governance with a fair balance between large and small member states. More solidarity will be needed if transfers from richer to poorer and stronger to weaker are to happen. Taoiseach Enda Kenny, for example, makes a cogent case against Ireland also looking for debt write-downs like Greece; but he will have to convince a more aware public this is so. It is a huge challenge but a necessary and worthwhile one.