FT’s Tony Barber about the austerity fashion week Europe witnesses these days:
What is more, the remedies proposed are usually the same, too. Stronger economic governance for the eurozone. Tougher fiscal rules. Extending the single market. More flexible labour markets, but not at the cost of social protection. Incentives for innovation in business. Better education systems.
Like identical tin soldiers, these proposals have marched out of every box of ideas that I have seen produced in the EU over the past three years. I am not saying they are wrong. Far from it. They are on the right lines. I am only asking: In the light of the dismal lack of far-sighted political leadership in Europe in recent times, why should I have any faith that these proposals will be converted into reality?
Source: Tony Barber’s blog (The Financial Times)
He has a point, indeed. I don’t think European political leaders have the mental tools to tackle this crisis in a responsible way. I think that the very European leaders that created the crisis will delay the austerity cure and collectivize their private and national risks at a European and public level.
As El-Erian puts it:
The temptation in Europe over the next few days will be to do more of the same; and for the US to press Europe to do more of the same.
This would involve European governments committing to even greater official intervention, and the ECB to even larger purchases of dubious assets. At the same time, there would be a temptation to dial up the rhetoric against markets, and to co-opt the IMF even more into an unsustainable approach.
“Active inertia” could, albeit with declining probability, stabilize markets for a short period of time. But the longer-term reality will not change. Absent a significant change in the European policy mindset, officials will find themselves pulled even more into multi-round dynamics that support debt with more debt and, in the process, contaminate the good with the bad.
The alternative approach-that of addressing directly the solvency issues and also focusing the backstop where, due to better fundamentals, contagion would be rendered temporary and reversible -is not risk free. Nor is it simple.
Yes, it is not easy to change track, especially after last weekend’s protracted negotiations and compromises in Brussels and Frankfurt; and, yes, the risks of immediate disruptions are material. Yet it is the right thing to do for the longer-term heath of Europe and the global economy.