FINancial Times Editorial Comment: Europe decides what union means

FINancial Times Editorial Comment: Europe decides what union means
Copyright The Financial Times Limited 2010
Published: February 10 2010 20:06 | Last updated: February 10 2010 20:06
http://www.ft.com/cms/s/0/64d6c0ba-167a-11df-bf44-00144feab49a.html


The European Union does not handle every crisis well, but it has at times shown a remarkable ability to grit its teeth and stay on course. Reading the euro’s doom in the entrails of market jitters or hectic meetings over Greece’s fiscal woes is mistaken. The euro will survive, and the spectre of a Greek default may even reignite a long-stalled drive towards greater co-operation.

The fears being peddled about flagging confidence in the euro or a break-up of the eurozone are mostly nonsense. This is an overvalued floating currency; its depreciation would be a good thing for its slow-growing members. As for a break-up, no country can be forced off the euro, nor would one voluntarily opt for the resulting chaos.

Still, a Greek sovereign default would cause Europe-wide harm (beyond bruising but insignificant embarrassment). The repercussions would travel through losses taken by institutions owning Greek assets, most importantly Greek banks. Less inevitable but more damaging would be a panic in other sovereign debt markets.

The ideal outcome would be that markets calm down. But hoping for serenity is no policy. EU leaders must decide – now – what to do in an emergency where Greece cannot refinance its debt. It must do so in ways that make the problem less likely to recur in future.

Part of the bargain to make the single currency a reality were rules designed to reassure Germany it would not have to bail out the likes of Greece. But this discipline was never credible – Greece cheated its way into the euro and even Germany flouted the rules when it suited. The casualty was market discipline: markets see a Europe willing to let countries go to the brink but politically bound to save them from going over.

The EU’s immediate priority is to stave off disaster without undoing the discipline that remains. It must ask the IMF to be prepared to step in should bond markets abandon Greece. While the EU can provide the funding, only the IMF can set conditions as credibly as markets. It is high time for Europe to stop being so prickly on this – after all well-run Poland already enjoys an IMF credit line.

Second, it must prevent contagion to other countries’ debt. An explicit programme for assistance in a refinancing crisis – not for Greece, but for euro members with a good fiscal record – would eliminate self-fulfilling market panics.

Third, such a programme should only be a first step. Until now euro members were not ready for fiscal co-operation. Clinging to a fiction that they would let one of their own fall undermined their credibility. Markets are calling their bluff.

Euro members must start to build an explicit framework to govern their fiscal interdependence. This crisis is a result of failed policies – but it presents an opportunity for setting them right.