But all is not well in eurozone. The global financial crisis left poorer nations like Ireland and Greece teetering on the edge of bankruptcy. Germany and France provided the bulk of the combined 195 billion-euro rescue package for the two countries, much to the displeasure of German chancellor Angela Merkel, who warned fellow EU leaders back in October that Germany could drop the euro if private investors and less prosperous eurozone nations didn't start sharing the buyout burden.
As EU prime ministers meet in Brussels this week to discuss the debt crisis and negotiate terms on bailouts going forward, a primer from commentators on how things got so dire and what needs to be done for the euro to survive.
- No Exit Strategy Nicholas Hastings of The Wall Street Journal's The Source blog says the failure of EU leaders to agree upon "a longer-term rescue plan to prevent a sovereign default" has put the entire currency at risk. Particularly alarming to currency traders, observes Hastings, is that the EU leaders meeting in Brussels have already punted on issuing "euro-zone-wide bonds" and "increasing the rescue funds that the EU is setting aside for further bailouts." Choking off access to a depleted rescue fund amidst a still-active debt crisis perplexes both Hastings and some of Wall Street's top credit agencies. Hastings notes that Moody's is poised to downgrade its rating on Spanish debt and "[Belgium] had its credit-rating outlook cut to negative from stable by Standard & Poor’s as the country’s inability to put together a government since July hardly bodes well for fiscal discipline."
- The Eurozone
Problem and How to Fix It Anthony
Mirhaydari of MSN Money says a lack of unity--both fiscal and
cultural--is to blame for eurozone's recent struggles. The lack of a "fiscal union to back the common currency" is the "fundamental flaw in the eurozone's design," while it's hard to have an "optimal currency area" without a "common language, ... or even common social values." Here's what has to happen:
The only way to restore competiveness is to engineer falling prices, or deflation, via a deep and protracted recession. ... The key will be to remedy the inherent flaws in the original mechanisms behind the euro. Namely, the Germans must compromise ... The strong would support the weak, just as strong states like Texas have supported hard-hit states like Nevada and Florida during the U.S. recession. ... In exchange, weaker countries like Ireland and Greece must accept more stringent regulatory oversight of their banking systems and fiscal budgets. This will represent the forfeiture of some sovereign independence, but compromises must be made.
- At What Cost? Merkel and French President Nicolas Sarkozy have expressed a desire to "harmonize taxes and labor regulations throughout the euro zone" in an attempt to better integrate the various economies, an action The Wall Street Journal's Marian Tupy believes is a mistake. Tupy says former Soviet countries will struggle to meet the new standards. "When East and West Germany reunified in 1990," he notes, "one of their first moves was to overhaul East Germany's labor regulations so that they matched those of the West." Yet this "proved disastrous for the much less productive East German economy, which had had no time to adjust to the exigencies of the free market," and suffered from persistent unemployment as a result. Pursuing a similar policy currently across the continent, Tupy argues, would only make it harder for less prosperous nations to pull their weight, and do "long-term damage to [a poorer country's] economic growth." The wealth advantage enjoyed by Germany and France, meanwhile, would only increase.
- Bonds, Bonds, Bonds Writing in The New York Times, former European Bank for Reconstruction president Jacques Atalli and Greek minister of state Haris Pamboukis make the case that while the euro is safe for now, something must be done to prevent a domino effect of eurozone countries defaulting one after another. "The worst-case scenario" is that "most threatened countries will attempt to avoid a catastrophe by adopting austerity programs. However, these will prove to be insufficient to restore investor confidence and ineffective in repelling attacks by speculators, which drive up their borrowing rates. The default dominoes will begin to fall," and the financial system underwriting the debt with them. Atalli and Pamboukis propose "backstopping" the European Central Bank with a "European fiscal authority with several indispensable instruments: the ability to issue European treasury bonds and raise federal taxes, and the capacity for decisive action at the European level." A European Treasury, with financial backing from the European Union, is the only way for eurozone countries to "build our way out of this systemic crisis instead of urgently plugging gaps."