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10may10
After crisis fund, EU faces long-term battles
The European Union made a bold, $1 trillion move to stave off the threat of wider debt-crisis contagion, but it went nowhere in resolving the deep political faultlines running through the 27-nation bloc.
Global financial markets and the euro single currency have responded positively to news of the special crisis mechanism, reached after 12 hours of talks in Brussels and involving the EU providing up to 500 billion euros in emergency funds and the IMF 250 billion euros more.
With the European Central Bank also agreeing to buy euro zone government bonds in the open market, the collective impact has been to erect a vast, imposing safety net under the euro area to prevent Greece's debt crisis spiraling and infecting Portugal, Spain or other EU member states.
In the short-term, financial analysts expect the dramatic decision, with its "shock and awe" $1 trillion headline figure, to tame the worst of a crisis that had steadily intensified over the past five months and threatened the global economy.
But it has done nothing to address the political and structural economic differences across the 16-country euro zone, and the broader European Union, which were the kindling that allowed the crisis to ignite in the first place.
"What they've put in place is a mechanism to react to a crisis," said Janis Emmanouilidis, a senior analyst at the European Policy Center, a Brussels think-tank.
"That does not mean that they have put in a place a system to coordinate economic policies in the long term, and that is far more important for long-term stability."
Structural Reforms
The core of the crisis lies in the high deficit and debt conditions immediately afflicting the likes of Greece, Portugal, Spain and Ireland, as well as the deeper structural economic shortcomings southern European countries have long had.
As EU policymakers and German Chancellor Angela Merkel have repeatedly emphasized, the key to the euro zone being able to fend off future crises is getting budget deficits and debt under control while forcing deep-rooted adjustments to those economies that lack competitiveness and are hampered by slow growth.
None of those issues are tackled by a $1 trillion fund.
Greece, which has suffered the most in the debt crisis, has had to push through several austerity plans, making promises to cut state pensions, free up labor markets, raise taxes and rid the economy of waste, in order to secure EU bail-out funds -- 110 billion euros on top of the 750 billion agreed overnight.
Portugal, Spain, Italy and other euro zone member states will now be under pressure to take similar steps to Greece -- however politically unpopular -- in order to insulate the region in the long term and remove the need for the emergency funding.
But that process, if it happens, will be long and deeply divisive, pitting Germany and its northern euro-zone allies against those countries not seen to be pulling their weight. The fallout could include social unrest like that in Greece.
"There are going to be many years of pain in southern Europe, this is just the beginning," said Charles Grant, the director of the Center for European Reform in London.
"The underlying cause of the crisis, which is the lack of competitiveness in the southern European economies, has not gone away. It's very hard to see how the crisis will lift for up to five years because the competitiveness issue is so serious."
Coordinating Policies
What the crisis has done, however, is galvanize the euro zone and the broader EU into taking hard and fast action.
For nearly six months after the Greek debt crisis erupted, euro zone leaders talked about taking measures and said they had deals to protect Athens, but financial markets were not convinced and ultimately forced the euro zone's hand.
Now leaders have acted with resolve in creating the 750 billion euro emergency mechanism and may well have succeeded in seizing back the initiative from financial markets, which many EU officials had criticized for exacerbating the crisis.
But analysts say the EU has really just bought itself time. There will be skepticism again if leaders do not grasp this opportunity to get their finances in order and take the tough decisions that will strengthen their economies longer-term.
And it is not just a case of southern Europe overhauling its pensions and labor policies. Germany has to acknowledge that its large trade surplus and lackluster domestic demand also cause imbalances that affect the euro zone economy.
"Germany isn't understanding that it is part of the problem," said Grant. "It has to stimulate demand to reduce its current account surplus, but that is going to lead to more political tension and discussion over who needs to do what to correct the economic imbalances."
EU leaders have already spent months talking around the issue of "economic governance" -- code for establishing much better coordination among the euro area and the 27 EU states to avoid a worsening "two-speed" Europe.
"In the long term they need to decide what they are going to do about fiscal policy, taxation, labor markets, pensions systems," said Emmanouilidis, listing some of the more complex challenges the EU is going to have to tackle. "Those are steps you don't take in the midst of a crisis and we are still in the midst of a crisis."
[Source: By Luke Baker - Analysis, Reuters, Brussels, 10May10]
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