On 2 May 2010 the EU and IMF agreed a large bail out for Greece. Mr Barroso, the EU President of the Commission heralded this with the words “The eurozone is certainly regaining confidence. Our fundamentals are certainly good”. The Head of the European Central Bank, Mr Trichet, said the package “helps to restore confidence and safeguard financial stability in the euro area”. The Austrian Finance Minister told us it “send a clear signal to the markets that Europe is able” to handle the crisis and “minimise the risk” of its spreading. Mrs Merkel said it would mean all other Euro states “will do all they can to avoid this themselves.”
Seven months later we have the same type of crisis in Ireland. The Irish government was pushed into a rescue, probably because the European Central Bank was no longer prepared to make money available to Irish banks on the scale needed. The nervousness created in the Irish bond markets by the criticisms of Ireland’s financial position from its partners in the EU did not help. Much of the rescue package is likely to take the form of a refinancing, shifting the risk of the Irish banks away from the ECB towards the Irish state and the countries lending Ireland the money.
Will this bail out be the last? Have the European authorities now done enough? The danger is that the very public way Ireland was pushed into this bail out and refinancing of the debts could one day apply to another EU state. Markets have got the message that if they push hard enough they can force action, and some EU officials seem to think making more of the national debts EU wide obligations is a good thing, the way to go, as it brings more EU control over the budgets.
The strategy can only work if at the same time someone solves the underlying problems. They are two fold. The first is many EU states spend too much and collect too little in tax revenue. They need faster growth to make bringing these two figures into balance easier. Will they get faster growth from the policy mix favoured by the EU and IMF? The inability to devalue within the Euro removes one of the normal ways heavily indebted and less competitive states sort out their problems. Euro states have to do it by cutting wages and cutting public spending, which is tough and difficult to do in democracy.
The second is there are still weak banks within the EU area guaranteed by states that are themselves short of money. These banks need to be wound down or sold on to new owners with longer pockets. Keeping them as expensive pensioners of the state is not a good solution. The sooner state supported banks are reduced to sustainable businesses, the better. Governments have pledged to protect depositors, but there is no such need to protect all the bad business and businesses within these banks.