欧洲的犹豫之年

The dire economic situation in which most of the rich world found itself in 2011 was not merely the result of impersonal economic forces, but was largely created by the policies pursued, or not pursued, by world leaders. Indeed, the remarkable unanimity that prevailed in the first phase of the financial crisis that began in 2008, and which culminated in the $1 trillion rescue package put together for the London G-20 meeting in April 2009, dissipated long ago. Now, bureaucratic infighting and misconceptions are rampant.

Worse still, policy disagreements are playing out more or less along national lines. The center of fiscal conservatism is Germany, while Anglo-Saxon countries are still drawn to John Maynard Keynes. This division is complicating matters enormously, because close international cooperation is needed to correct the global imbalances that remain at the root of the crisis.

Doubts about sovereign debt in Europe have revolved around the euro to such an extent that some now question whether the single currency can survive. But the euro was an incomplete currency from the outset. The Maastricht Treaty established a monetary union without a political union – a common central bank, but no common treasury. Its architects were aware of this deficiency, but other flaws in their design became apparent only after the crash of 2008.

The euro was built on the assumption that markets correct their own excesses, and that imbalances arise only in the public sector. As it happened, some of the largest imbalances that fueled the current crisis arose in the private sector – and the euro’s introduction was indirectly responsible.

In particular, sovereign debt in the eurozone was deemed riskless: banks had only to hold minimal reserves against member countries’ bonds, which the European Central Bank accepted on equal terms at its discount window. Member countries could borrow at practically the same interest rate as Germany, and banks were happy to earn a few extra pennies by loading up their balance sheets with the government debt of the eurozone’s weaker economies. For example, European banks hold more than a €1 trillion ($1.3 trillion) of Spanish debt, with German and French banks holding more than half of that sum.

Instead of the convergence prescribed by the Maastricht Treaty, the radical narrowing of interest-rate differentials generated divergences in economic performance. Countries like Spain, Greece, and Ireland developed real-estate bubbles, grew faster, and developed trade deficits with the rest of the eurozone, while Germany – weighed down by the costs of reunification – reined in its labor costs, became more competitive and developed a chronic trade surplus.

The convergence of interest rates was broken when a newly elected government in Greece revealed that the deficit incurred by the previous government was much larger than had been reported. European authorities were slow to react, because member countries held radically different views.

Germany, traumatized by runaway inflation in the 1920’s, and its dreadful political consequences, adamantly opposed any bailout. Moreover, it was heading into an election cycle, which increased the rigidity of its position. With German leaders insisting on charging penalty rates for providing assistance, the crisis festered – and the rescue costs continued to grow.

Indeed, as eurozone members’ inability to print their own money effectively relegated them to the status of less-developed countries that must borrow in a foreign currency, risk premiums widened accordingly. The authorities, seeing no solution, kicked the can down the road – an approach that usually works, because problems become easier to solve when markets calm down. But, in this case, the crisis kept growing bigger, and the authorities ran out of road when Germany’s Constitutional Court ruled out additional guarantees beyond the European Financial Stability Facility (EFSF) without the consent of the Bundestag.

At the European Union’s December 9 summit in Brussels, the eurozone countries agreed to establish a closer fiscal union. But, by the time this decision was taken, it was no longer sufficient to bring the financial crisis under control.

The measures introduced by the ECB went a long way toward relieving banks’ liquidity problems, but nothing was done to reduce the large risk premiums on government bonds. Because the premiums are intimately interconnected with the banks’ capital deficiencies, half a solution is not good enough. Unless the sovereign debt of the rest of the eurozone is successively ring-fenced, a Greek default could cause a meltdown of the global financial system.

Even barring such a nightmare scenario in 2012, the summit sowed the seeds of future conflicts – over the emergence of a “two-speed” Europe and the false economic doctrine guiding the eurozone’s proposed fiscal pact. That doctrine, by imposing austerity in a period of rising unemployment, threatens to push the eurozone into a vicious deflationary debt spiral from which it will be difficult to escape.