Vox
January 3, 2012
Another year, and the Eurozone crisis lingers on. This column asks why, and discusses what can be done. It proposes a solution that can be achieved without the pain of a new EU treaty.
This time last year, I wrote a Vox column wishing us all a better year than the previous one. Alas, 2011 was worse than 2010 and things don’t look good for 2012. The new year will see the Eurozone relapse into recession with a probably that approaches 100%. Is there is any reason to be hopeful?
Why does the crisis linger, deepen and spread?
The crisis is, first and foremost, the result of policy mistakes. The authorities have never articulated a clear diagnosis. They cite a long list of woes. Some are correct but obvious, for example, the absence of fiscal discipline in the Eurozone and the associated moral hazard inherent to rescues. Others are sideshows, for example, large current-account imbalances. Most are deeply misleading, for example, blaming financial market speculation and rating agencies pessimism or worrying about inflationary risks and about widening budget deficits. To round up this depressing list, some problems are conspicuously ignored or played down, for instance, the sorry state of commercial banks, the need for serious debt defaults, and the absence of growth prospects.
It would have been a miracle if policy decisions drawn up without a clear diagnosis had been adequate. This is why 2011 was a rerun of 2010. And looking forward, heightened austerity in virtually all Eurozone countries is taking us straight into recession. Fanciful proposals for “voluntary” debt reduction – a.k.a. public sector involvement or PSI – have been on and off the table; they block any possibility for an increasing number of Eurozone countries to recover market access.
Because of the focus on moral hazard, comprehensive solutions remain elusive. Proposals to strengthen the Stability and Growth Pact keep piling up, each one aiming at more automaticity and tougher sanctions. Yet it was only at its last meeting in December 2011 that the European Council recognised that the Pact cannot work when nations are sovereign. A new treaty that would allow for a suspension of sovereignty is now being proposed. A safe bet is that this will not happen.
It is not surprising, therefore, that the situation has considerably worsened. By end 2010, three countries (Greece, Ireland, and Portugal) were facing mounting borrowing costs. During 2011, two of the largest Eurozone countries (Italy and Spain) joined the list. And now two more (Belgium and France) are slowly but surely sliding into the same bad equilibrium. Recession will seriously worsen the debt arithmetic.
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