Europe's way out of debt crisis is through political change
IN ANCIENT times, the Trojans came to grief when they failed to heed a priest's warning against Greeks bearing gifts. More recently, leaders of the European Union brushed aside worries about extending the Greeks a gift -- inclusion in the European monetary union -- for which that notoriously mismanaged country was not truly prepared. They compounded the error by including Spain, Portugal and Ireland.
A strong currency, the euro was supposed to provide an incentive for these countries to improve competitiveness and maintain high fiscal standards. But to varying degrees, they spent the windfall instead. The inevitable debt crisis is now at hand; having begun in Greece, it may be spreading to Spain, whose sovereign debt Standard & Poor's downgraded yesterday. In pre-euro times, Greece, Spain, Portugal and others would have coped by devaluing their national currencies and boosting exports. Today, brutal austerity is their only choice.
While it appears to be economic, the European debt crisis is actually political in nature. There was idealistic zeal about extending a single currency to a wide variety of countries but no will to create either a mechanism to harmonize their fiscal policies or a clear legal authority for an E.U. bailout. Now this halfway house is coming apart. There is much talk about repairing it -- improving European "governance" -- so that the E.U. bureaucracy in Brussels can keep countries in line economically. But it's far from clear whether this crisis is making Europe more governable, or less.
If Germany and France, aided by the International Monetary Fund, cobble together a rescue package for Greece, as we expect, the residual resentments are likely to be powerful and lasting. Germans, who have already taken significant steps to trim their welfare state, will gripe about subsidizing the Greeks' more generous one. Greeks will complain about the austerity imposed upon them in return for German aid. With or without bailouts, Southern Europe is about to pay for continued euro membership with years of budget cuts, higher taxes and unemployment. This is not exactly a formula for European comity.
There is a way out, but this, too, will require political change. For all of Europe's indebted governments, the key statistic is the ratio of government debt to gross domestic product. (Greece's is 125 percent or so.) Austerity can cut the numerator -- debt -- but only growth can increase the denominator -- GDP. In many countries, labor protections, bloated public sectors, byzantine taxes and other stultifying policies have hindered private investment and employment. From Madrid to Athens, politicians must take on the special interests that benefit from outmoded practices lest their countries sink into permanent stagnation or worse.