New York Times Editorial: Europe’s Bailout

New York Times Editorial: Europe’s Bailout
Copyright by The New York Times
Published: May 10, 2010
http://www.nytimes.com/2010/05/11/opinion/11tue2.html?th&emc=th


Europe’s leaders stared into the abyss and finally decided to act. The nearly $1 trillion bailout package, arranged over the weekend, is intended to head off Greece’s default and stop the crisis from dragging under other weak economies — Portugal, Spain, Ireland and Italy are all vulnerable.

The European and American markets celebrated on Monday. The CAC-40 index in Paris rose almost 10 percent. The Dow Jones industrial average rose 3.9 percent. It was certainly the right thing to do. Coupled with the European Central Bank’s promise to buy bonds from stricken European countries, it arrested the financial turmoil — at least for now.

There is good reason to question whether even these steps will be enough. The strategy’s biggest weakness is that it assumes that badly hobbled countries, starting with Greece, can regain their ability to service their debts by slashing their budget deficits.

These economies are already struggling; some are still caught in recession. The International Monetary Fund expects Greece’s economy to shrink by 2 percent this year and by 1 percent in 2011. Overly harsh budget cuts will make the situation worse — making it even harder for Greece, and others that request the bailout, to honor their debts.

Greece, which got its own bailout of around $140 billion last week, definitely overspent and must cut a budget deficit that has now reached 13.6 percent of its gross domestic product. The bailout plan negotiated with the European Union and the I.M.F. calls for Greece to reduce that deficit to less than 3 percent of G.D.P. by 2014 — an adjustment equal to one-tenth of its economy. At the same time, it is supposed to remain current on all of its debt service payments. It is hard to see how that is fiscally possible.

Spain’s economy also is forecast to shrink this year. Portugal’s to barely grow. If they decide to dip into the new bailout fund, they likely would be served the same potentially self-defeating recipe.

Meanwhile, the banks that caused much of this mess are getting all their money back. A more equitable approach would require the banks to pay at least part of the bill — writing down the debts of some European governments or extending their maturities into the future to allow battered European economies time to recover.

This lopsided distribution of costs is built upon a distorted narrative: profligate governments from Europe’s less responsible nations spent beyond their means and now can’t repay their debt. Except for Greece, that is not what happened.

In 2007, before the financial crisis, Spain had a budget surplus of 2 percent of G.D.P. Ireland had a balanced budget. Portugal’s deficit of 2.6 percent was well within the euro area’s accepted limits. Today their budgets are all deep in the red because the global collapse slashed economic activity, boosted unemployment and required a large-scale government response.

We understand why European governments are not demanding that the banks share the burden. Rescheduling Greece’s debt, or that of other governments, could weaken the balance sheets of European banks and make financial markets more unstable.

That’s the reason the Obama administration went so light on American banks. Still, Europe may not be able to solve its problems without bringing the bankers in to pay their share.