Europe at the Brink

New York Times
Editorial
July 19, 2011

Time is running out for salvaging Greece and, beyond it, Europe’s shared currency, the euro. Thursday’s emergency summit meeting looms as a Lehman Brothers moment.

If Europe’s leaders fail to extricate Greece from its current unsustainable debt-servicing obligations — by lowering interest rates and lengthening maturities at a minimum — the market reaction, for all of Europe, may be unforgiving, and uncontainable as investors conclude that no European sovereign debt is safe from possible default.

Had Europe faced up to the Greek problem a year and a half ago, the crisis would likely be more contained and manageable today. It should have reached a broad pact with Athens by trading growth-promoting reforms for long-term financial guarantees and relief.

But that would have meant telling taxpayers in Germany and other northern European countries that they might have to finance some of the bailout and recovery costs (as they will end up doing anyway). And it would have meant acknowledging that heavily exposed German and French banks might have to be recapitalized at taxpayer expense.

Instead, European Union leaders imposed on Greece harsh austerity conditions that suffocated growth. They lent just enough money so it could keep paying creditors, while the ratio of its debt to gross domestic product soared.

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