The Euro deal at least averted an immediate banking crisis and induced temporary market euphoria, but it is not going to provide a lasting solution to the Euro sovereign debt crisis because it will block any lasting recovery for the European economy.
It is worth reading the text of the deal, which represents a major victory for the European "austerians." It calls for an intensification of deficit reduction and structural reform in the high debt countries like Italy (No. 4); imposes continuing on the ground "monitoring" of the Greek government (No. 10); imposes strict conditionality in any new aid packages (No. 7); calls for balanced budget legislation as recently introduced in Spain (No. 26); and requires pre-examination of the national budgets of high debt countries by the euro area authorities (No. 27.) In short, it anticipates major new belt-tightening measures and renewed austerity for a Euro area which is probably already in recession, according to Bank of Canada Governor Mark Carney.
The deal also (No. 2) endorses continued ECB pursuit of the goal of price stability, rejecting some calls for a reversal of recent increases in ECB interest rates, and anticipates no major role for the ECB in backing the expanded bail-out fund. That means that government debt will actually have to increase as the stronger countries buy up the bonds of weaker countries through a levered up EFSF. And, on top of that, some countries will have to assist banks in raising new capital to pay for the cost of the 50 per cent write-off on Greek bonds.
Writing just before the deal was struck, ETUC economist Andrew Watt argued for an expanded role for the ECB to back-stop all Euro-area sovereign debt, and less rather than more fiscal austerity.
Instead, the German prescription of "sound" finances, tight money and "disciplined wages" is being imposed on all of Europe. Germany has indeed been able to export its way to growth by keeping wage growth very low in relation to productivity, but how can all of Europe do the same? It just doesn't add up. And that impossibility will soon be reflected in national politics, not least in France and Italy where the left just may be able to regain some momentum.
This article was first posted on The Progressive Economics Forum.
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