Vox
June 17, 2010
Financial crises feed on uncertainty. This essay warns that the longer the Eurozone crisis is allowed to linger, the greater will be the damage. But Europe can take concrete actions to bring it to an end. It should make bank stress tests public, provide more clarity on its special purpose vehicle, move forward with restructuring Greece’s debt, and support growth through quantitative easing.
Financial crises feed on uncertainty. The longer uncertainty is allowed to linger, the greater the damage to confidence and the more difficult it becomes to repair. It is essential therefore that European policymakers move decisively to draw a line under the crisis.
This will be easier said than done. The Greek, Portuguese, and Spanish governments are struggling to build a consensus for fiscal consolidation. Ireland shows that doing so is possible. But street demonstrations across Southern Europe are a reminder that replicating its success will not be easy. Political consensus for fiscal consolidation is not built in a day.
And if fiscal consolidation is hard, structural reform is harder. Fiscal consolidation means belt-tightening, but pension and labour market reforms cut to the heart of national social and economic models. The reform of models will be an ongoing process stretching over years. Modest down payments will add a fillip to confidence, but they will not draw a line under the crisis.
More challenging still is the reform of EU institutions, since not just one but 27 national polities have to agree. To avoid similar crises in the future, Europe will have to build out the institutions of its monetary union. It will have to create a proper emergency financing mechanism – no more emergency meetings at 2 o'clock in the morning, and no more special purpose vehicles to finesse awkward statutory provisions. It will have to create institutions of fiscal coinsurance to provide temporary transfers to countries with strong policies but transitory budgetary problems.
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