Tuesday, May 11, 2010;
SUNDAY WAS "Europe Day" -- the 60th anniversary of the memorable 1950 "Schuman Declaration," in which a French foreign minister proposed consolidating Europe's coal and steel industries, setting the war-ravaged continent on the path to becoming what is now the European Union. But this year's Europe Day was almost a very unhappy occasion. As the weekend began, financial markets seemed unimpressed by the aid package the European Union and the International Monetary Fund had cobbled together for debt-strapped Greece. Monday threatened to bring an acceleration in the speculative attack on the euro, with potentially dire consequences for the global economy.
Fortunately, E.U. political leaders acted decisively to head off such a disaster, announcing about $1 trillion worth of financial backing for troubled debtor governments such as Spain and Portugal. Markets responded with a cheer; for now, at least, there will not be another Great Panic. Credit for this expensive but necessary step goes not only to IMF chief Dominique Strauss-Kahn, French President Nicolas Sarkozy and German Chancellor Angela Merkel, who stopped dithering and confronted the short-term menace in something like its full dimension, but also to President Obama and Federal Reserve Chairman Ben S. Bernanke. They nudged and assisted their European colleagues to prevent a meltdown that might have damaged the fledgling U.S. recovery as well.
But let no one have any illusions about the price Europe will have to pay for this respite. Among the riskiest measures it has adopted is a new policy by the European Central Bank, which has agreed to serve as a buyer of last resort for even the junkiest of European government bonds. As recently as Thursday, the ECB was refusing to take such a drastic step -- tantamount to paying the debts of Spain, Portugal, Greece and possibly others with printed money. The markets have now forced the ECB to cross that line, with consequences for its long-run credibility that can only be speculated about.
And it is only a respite. The vast bailout buys European governments time to get their fiscal houses in order. It hardly guarantees that they will do so. The European Union must adopt tighter methods for holding member states to the coordinated promises of fiscal discipline without which the euro cannot survive. The most deeply indebted member states, meanwhile, must not only cut deficits but also restructure to raise their competitiveness and reignite growth. And the European Union's more successful economies, especially Germany, must retool to depend less on exports for growth, lest they condemn their Southern neighbors to an unending cycle of debt and austerity.
These long-postponed changes will require even more political courage than it took to come up with the rescue package. There are hard times ahead for millions of Europeans, many of whom will no doubt ask why they must sacrifice so much for the sake of an ideal, European unity and its currency. The only effective answer can come in the form of changes that pave the way for a more prosperous and dynamic continent. If Europe's leaders fail to seize this opportunity, then the austerity ahead will have been for naught, and the dream of a united Europe that began 60 years ago could wither.